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Module 3 Practice Problem 3 - Cash Budgeting Rusty Spears, CEO of Rusty's Renovations, a custom building and repair company, is preparing documentation for a line of credit request from his commercial banker. Among the required documents is a detailed sales forecast for parts of 2015 and 2016. Estimates obtained from the credit and collection department are as follows: collections within the month of sale, 15%; collections during the month following the sale, 65%; collections the second month following the sale, 20%. Payments for labor and raw materials are typically made during the month following the one in which these costs were incurred. Total costs for labor and raw materials are estimated for each month as shown in the table. General and administrative salaries will amount to approximately $15,000 a month; lease payments under long-term lease contracts will be $5,000 a month; depreciation charges will be $7,500 a month; miscellaneous expenses will be $2,000 a month; income tax payments of $25,000 will be due in both September and December; and a progress payment of $80,000 on a new office suite must be paid in October. Cash on hand on July 1 will amount to $60,000, and a minimum cash balance of $40,000 will be maintained throughout the cash budget period. Input Data Collections during month of sale Collections during month after sale Collections during second month after sale Lease payments Target cash balance General and administrative salaries Depreciation charges Income tax payments (Sep & Dec) Miscellaneous expenses New office suite payment (Oct) Cash on hand July 1 15% 65% 20% $5,000 $40,000 $15,000 $7,500 $25,000 $2,000 $80,000 $60,000 Sales, labor, and RM adjustment factor Note: When the percent collected during the second month after sale is changed, the percent for collections during month after sale is automatically changed so that 100% of sales are collected during the three-month period. 0% Prepare a monthly cash budget for the last six months of the year. Original sales estimates Original labor and raw mat. estimates Forecasted Sales Sales (gross) Collections During month of sale During 1st month after sale During 2nd month after sale Total collections May $60,000 $75,000 June $100,000 $90,000 July $130,000 $95,000 August $120,000 $70,000 September $100,000 $60,000 October $80,000 $50,000 November $60,000 $20,000 December $40,000 $20,000 January $30,000 $60,000 $100,000 $130,000 $120,000 $100,000 $80,000 $60,000 $40,000 $30,000 19500 65000 12000 $96,500 18000 84500 20000 $122,500 15000 78000 26000 $119,000 12000 65000 24000 $101,000 9000 52000 20000 $81,000 6000 39000 16000 $61,000 Purchases Labor and raw materials Payments for labor and raw materials $75,000 $90,000 $95,000 $90,000 $70,000 $95,000 $60,000 $70,000 $50,000 $60,000 $20,000 $50,000 $20,000 $20,000 60,000 15,000 5,000 2,000 50,000 15,000 5,000 2,000 20,000 15,000 5,000 2,000 25,000 Payments Payments for labor and raw materials General and administrative salaries Lease payments Miscellaneous expenses Income tax payments Design studio payment Total payments 90,000 15,000 5,000 2,000 95,000 15,000 5,000 2,000 70,000 15,000 5,000 2,000 25,000 $112,000 $117,000 $117,000 80,000 $162,000 $72,000 $67,000 Net Cash Flows Cash on hand at start of forecast period Net cash flow (NCF): Total collections - Total payments Cumulative NCF: Prior month cumulative + this month's NCF $60,000 ($15,500) $44,500 $5,500 $50,000 $2,000 $52,000 ($61,000) ($9,000) $9,000 ($0) ($6,000) ($6,000) $40,000 $4,500 $40,000 $10,000 $40,000 $12,000 $40,000 ($49,000) $40,000 ($40,000) $40,000 ($46,000) Cash Surplus (or Loan Requirement) Target cash balance Surplus cash or loan needed: Cum NCF - Target cash Max. Loan $49,000