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

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

Current cash balance		$10,685
Sales pattern		63% on credit and 37% in cash
Collections of credit sales		61% in 1 to 30 days; 27% in 31 to 60 days; 8% in 61 to 90 days; 4% never collected (bad debts).
Sales forecasts:
	Pessimistic	Most Likely	Optimistic
January (actual)		$24,780
February (actual)		$20,900
March (actual)		$21,630
April	$19,100	$23,550	$25,750
May	$21,300	$24,900	$27,300
June	$23,300	$29,870	$30,000
July	$23,900	$27,500	$29,100
August	$20,500	$25,800	$28,800
September	$18,500	$21,500	$23,900
Utilities expenses		$950 per month
Rent		$2,250 per month
Truck loan		$427 per month
The companys wages and salaries (including payroll taxes) estimates are:
April	$3,550
May	$4,125
June	$5,450
July	$6,255
August	$6,060
September	$3,525

The company pays 66 percent of the sales price for the inventory it purchases, an amount that it actually pays in the following month. (Rowena has negotiated net 30 credit terms with her suppliers.)

Other expenses include:
Insurance premiums	$1,200, payable in April and September
Office supplies	$125 per month
Maintenance	$75 per month
Uniforms/cleaning	$80 per month
Office cleaning service	$85 per month
Internet and computer service	$225 per month
Computer supplies	$75 per month
Advertising	$450 per month
Legal and accounting fees	$250 per month
Miscellaneous expenses	$95 per month
A tax payment of $3,140 is due in June.
Rowena has established a minimum cash balance of $1,500.

If Rowena must borrow money, she uses her line of credit at the bank, which charges interest at an annual rate of 10.25 percent. Any money that Rowena borrows must be repaid the next month.

1. Help Rowena put together a cash budget for the six months beginning in April.

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

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