Owen Rowdy had been in business for slightly more than two years, but he had never taken the time to develop a cash budget for her company. Based on a series of recent events, however, he knew the time had come to start paying more attention to his companys cash flow. The business was growing fast, with sales more than tripling from the previous year, and profits were rising. However, Owen often found it difficult to pay all the companys bills on time. He didnt know why exactly, but he knew that the companys fast growth was requiring his to incur higher levels of expenses.

Last night, Owen attended a workshop on managing cash flow sponsored by the local chamber of commerce. Much of what the presenter said hit home with Owen. This fellow must have taken a look at my companys financial records before he came here tonight, he said to a friend during a break in the presentation. On his way home from the workshop, Owen decided that he would take the presenters advice and develop a cash budget for his business. After all, he was planning to approach his banker about a loan for his company, and he knew that creating a cash budget would be an essential part of his loan request. He started digging for the necessary information, and this is what he came up with:

Owen sells a single product for $38 each. Sales are 60% cash and 40% on credit. All credit sales are collected in the month following the sale. At June 31, the balance in accounts receivable is $13,000, which represents the uncollected balance on June sales. Budgeted sales for the next four months follow:

Months Sales

July 850

August 1100

September 650

October 1200

The product cost is $22 per unit, and desired ending inventory is 60% of the following month's sales in units. Inventory on June 31 is 550 units. Purchases are paid 50% in the month of purchase and 50% in the following month. At June 31, the balance in accounts payable is $12,000, which represents the unpaid purchases from June. Operating expenses are paid in the month incurred and consist of:

Commissions (15% of sales) Shipping (2.5% of sales) Office salaries ($2,800 per month) Rent ($4,800 per month) Office Cleaning ($80 per month) Computer and internet Service ($200 per month) Accounting and legal fee ($220 per month)

Depreciation is $1000 per month. Income taxes are 40% and will be paid on October 1. There are no taxes payable on June 31. A minimum cash balance of $13,000 is required, and the beginning cash balance is $13,000. Loans are obtained at the end of any month when a cash shortage occurs. Interest is 1% per month based on the beginning of the month loan balance and is paid at each month end. If the ending cash balance exceeds the minimum, the excess will be applied to repaying any outstanding loan balance. At June 31, the loan balance is $5000.

Required: Part 1 1. Help Owen put together a master budget for each mouth of July, August, September that include:

Sales budget Schedule of cash receipts Merchandise purchases budget Schedule of cash disbursements for purchases of merchandise Schedule of cash disbursements for selling and administrative expenses (combined) Cash budget, including information on the loan balance Budgeted income statement for the quarter

Part II 2. Does it appear that Owens business will remain solvent, or could the company be heading for a cash crisis?

3. What suggestions can you make to help Owen improve her companys cash flow?