Helen Bowers, owner of Helen's Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2021 and 2022:

May 2021	$	150,000
June		150,000
July		300,000
August		450,000
September		600,000
October		300,000
November		300,000
December		75,000
January 2022		150,000

Estimates regarding payments obtained from the credit department are as follows: collected within the month of sale, 10%; collected the month following the sale, 75%; collected the second month following the sale, 15%. Payments for labor and raw materials are made the month after these services were provided. Here are the estimated costs of labor plus raw materials:

May 2021	$	75,000
June		75,000
July		105,000
August		690,000
September		225,000
October		195,000
November		135,000
December		75,000

General and administrative salaries are approximately $33,000 a month. Lease payments under long-term leases are $11,000 a month. Depreciation charges are $44,000 a month. Miscellaneous expenses are $3,300 a month. Income tax payments of $70,000 are due in September and December. A progress payment of $195,000 on a new design studio must be paid in October. Cash on hand on July 1 will be $134,000, and a minimum cash balance of $85,000 should be maintained throughout the cash budget period.

The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Round your answers to the nearest dollar. If your answer is zero, enter "0".

Download spreadsheet Cash Budgeting-8d6e81.xlsx

Prepare a monthly cash budget for the last 6 months of 2021. All payments and expenses should be entered as positive numbers. Net cash losses, negative cash balance, negative cumulative cash, and cumulative loans outstanding, if any, should be indicated by a minus sign.

	July	August	September	October	November	December
Collections and purchases worksheet
Sales (gross)	$	$	$	$	$	$
Collections
During month of sale
During 1st month after sale
During 2nd month after sale
Total collections
Purchases
Labor and raw materials
Payments for labor and raw materials
Cash gain or loss for month
Collections
Payments for labor and raw materials
General and administrative salaries
Lease payments
Miscellaneous expenses
Income tax payments
Design studio payment
Total payments
Net cash gain (loss) during month
Loan requirement or cash surplus
Cash at start of month
Cumulative cash
Target cash balance
Cumulative surplus cash or loans
outstanding to maintain $85,000
target cash balance

Prepare monthly estimates of the required financing or excess fundsthat is, the amount of money Bowers will need to borrow or will have available to invest. Required financing, if any, should be indicated by a minus sign.

	Required financing or
	excess funds
July	$
August	$
September	$
October	$
November	$
December	$

Now suppose receipts from sales come in uniformly during the month (that is, cash receipts come in at the rate of 1/30 or 1/31 each day), but all outflows must be paid on the 5th. Will this affect the cash budget? That is, will the cash budget you prepared be valid under these assumptions? If not, what could be done to make a valid estimate of the peak financing requirements? No calculations are required, although if you prefer, you can use calculations to illustrate the effects.

In a situation, where inflows and outflows are not synchronized during the month, it

isis not

likely to be possible to use a cash budget centered on the end of the month. To make a valid estimate of the peak financing requirements, the company

needs no additional actionsshould establish its maximum cash requirementshould establish its minimum cash requirementshould establish its average cash requirement

.

Bowers' sales are seasonal, and her company produces on a seasonal basis, just ahead of sales. Without making any calculations, discuss how the company's current and debt ratios would vary during the year if all financial requirements were met with short-term bank loans. Could changes in these ratios affect the firm's ability to obtain bank credit? Explain.

The months preceding peak sales would show

an increaseda decreased

current ratio and

an increaseda decreased

debt-to-capital ratio due to additional short-term bank loans. In the following months as receipts are collected from sales, the current ratio would

decreaseincrease

and the debt-to-capital ratio would

decreaseincrease

. Abnormal changes in these ratios

wouldwould not

affect the firm's ability to obtain bank credit.

If Bowers' customers began to pay late, collections would slow down, thus increasing the required loan amount. If sales declined, this also would have an effect on the required loan. Do a sensitivity analysis that shows the effects of these two factors on the maximum loan requirement. Enter your answers as positive numbers.

To complete the sensitivity analysis, follow these steps in excel:

Ensure that cell A60 is a reference to cell B56 (i.e. =B56).

Select/highlight cells A60 through H69 (A60:H69).

From the top ribbon, select Data > Forecast > What-If-Analysis > Data Table

For row input cell click on cell B5 or enter $B$5.

For column input cell click on cell B14 or manually enter $B$14.

Click "Ok".

		% Collections in 2nd month
Change in sales		0%	15%	30%	45%	60%	75%	90%
-100	%	$
-75	%
-50	%
-25	%
0	%
25	%
50	%
75	%
100	%