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CASH BUDGETING

Helen Bowers, owner of Helen's Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2016 and 2017:

	May 2016	$186,000
	June	186,000
	July	372,000
	August	540,000
	September	720,000
	October	360,000
	November	360,000
	December	90,000
	January 2017	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 2016	$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 $26,000 a month. Lease payments under long-term leases are $9,000 a month. Depreciation charges are $36,000 a month. Miscellaneous expenses are $2,600 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.

1. Prepare a monthly cash budget for the last 6 months of 2016. If no entry required, enter "0". Use minus sign to enter losses, loans outstanding or any other negative amounts.

   May

   June

   July

   August

   September

   October

   November

   December

   January

   Collections and purchases worksheet

   Sales (gross)

   $

   $

   $

   $

   $

   $

   $

   $

   $

   Collections

   During month of sale

   During 1st month after sale

   During 2nd month after sale

   Total collections

   $

   $

   $

   $

   $

   $

   Purchases

   Labor and raw materials

   $

   $

   $

   $

   $

   $

   $

   $

   Payments for labor and raw materials

   $

   $

   $

   $

   $

   $

   $

   Cash gain or loss for month

   Collections

   $

   $

   $

   $

   $

   $

   Payments for labor and raw materials

   General and administrative salaries

   Lease payments

   Miscellaneous expenses

   Income tax payments

   Design studio payment

   Total payments

   $

   $

   $

   $

   $

   $

   Net cash gain (loss) during month

   $

   $

   $

   $

   $

   $

   Loan requirement or cash surplus

   Cash at start of month

   $

   $

   $

   $

   $

   $

   Cumulative cash

   $

   $

   $

   $

   $

   $

   Target cash balance

   $

   $

   $

   $

   $

   $

   Cumulative surplus cash or loans outstanding to maintain $90,000 target cash balance

   $

   $

   $

   $

   $

   $

3. Prepare monthly estimates of the required financing or excess funds - that is, the amount of money Bowers will need to borrow or will have available to invest. Round your answers to the nearest dollar. Enter loans outstanding with minus sign.

   July	$
   August	$
   September	$
   October	$
   November	$
   December	$

5. Now suppose receipts from sales come in uniformly during the month (that is, cash receipts come in at the rate of 1/30 or 1/31 each day), but all outflows must be paid on the 5^th. 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. The input in the box below will not be graded, but may be reviewed and considered by your instructor.

7. 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 short-term bank loans. Could changes in these ratios affect the firms ability to obtain bank credit? Explain. The input in the box below will not be graded, but may be reviewed and considered by your instructor.

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