RRS CASH BUDGET FOR JANUARY AND FEBRUARY

November December January February March April

Sales

(1) Sales (Gross) $71,218 $68,212.00 $65,213.00 $52,475.00 $42,909 $30,524

Collections:

(2) During Month Of Sale

(0.2)(0.98)(Months Sales) 12,781.75 10,285.10

(3) During First Month After Sale

0.7(Previous Months Sales) 47,748.40 4 5,649.10

(4) During Second Month After Sale

0.1(Sales 2 Months Ago) 7,121.80 6,821.20

(5) Total Collections (Lines 2 + 3 + 4) $67,651.95 $62,755.40

Purchases:

(6) 0.85(Forecasted Sales

2 Months From Now) $44,603.75 $36,472.65 $25,945.40

Payments

(7) Payments For Purchases 44,603.75 36,472.65

(8) Wages And Salaries 6,690.56 5,470.90

(9) Rent 2,500.00 2,500.00

(10) Taxes

(11) Total Payments $53,794.31 $44,443.55

Net Cash Flows

(12) Cash At Beginning Of Forecast $ 3,000.00

(13) Net Cash Flow: Collections Payments $13,857.64 $18,311.85

(14) Cumulative NCF (Prior mos. + this mos. NCF) 16,857.64 35,169.49

Cash Surplus (or Loan Requirement)

(15) Target Cash Balance 1,500.00 1,500.00

(16) Surplus Cash Or Loan Needed $15,357.64 $33,669.49

Should depreciation expense be explicitly included in the cash budget? Why or why not?

In her preliminary cash budget, Johnson has assumed that all sales are collected and thus that RR has no bad debts. Is this realistic? If not, how would bad debts be dealt with in a cash budgeting sense? (Hint: Bad debts will affect collections but not purchases.)

Johnsons cash budget for the entire year, although not given here, is based heavily on her forecast for monthly sales. Sales are expected to be extremely low between May and September but then to increase dramatically in the fall and winter. November is typically the firms best month, when RR ships its holiday blend of coffee. Johnsons forecasted cash budget indicates that the companys cash holdings will exceed the targeted cash balance every month except for October and November, when shipments will be high but collections will not be coming in until later. Based on the ratios shown earlier, does it appear that RRs target cash balance is appropriate? In addition to possibly lowering the target cash balance, what actions might RR take to better improve its cash management policies, and how might that affect its EVA?

What reasons might RR have for maintaining a relatively high amount of cash?