May 2009 $180,000

June 180,000

July 360,000

August 540,000

September 720,000

October 360,000

November 360,000

December 90,000

January 2010 180,000

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 2009 $ 90,000

June 90,000

July 126,000

August 882,000

September 306,000

October 234,000

November 162,000

December 90,000

General and administrative salaries are approximately $27,000 a month. Lease payments

under long-term leases are $9,000 a month. Depreciation charges are $36,000 a month.

Miscellaneous expenses are $2,700 a month. Income tax payments of $63,000 are due in

September and December. A progress payment of $180,000 on a new design studio must be

paid in October. Cash on hand on July 1 will be $132,000, and a minimum cash balance of

$90,000 should be maintained throughout the cash budget period.

a. Prepare a monthly cash budget for the last 6 months of 2009.

b. 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.

c. Now suppose receipts from sales come in uniformly during the month (that is, cash

receipts come in at the rate of

1

/30

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.

Chapter 16Working Capital Management 521

d. Bowers sales are seasonal; and her company produces on a seasonal basis, just ahead

of sales. Without making any calculations, discuss how the companys current and debt

ratios would vary during the year if all financial requirements were met with shortterm bank loans. Could changes in these ratios affect the firms ability to obtain bank

credit? Explain.