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Cash Budget and Bank Debt

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Given the details below, do the following:
a. Construct a cash budget for Lawrence
b. Tell me what is the largest amount of bank debt needed and when is it needed. Circle them in the initial use case on the borrowing line of the matrix
c. What is the largest amount of surplus cash flow generated by Lawrence and when does it happen? Circle them in the initial use case on the net gain cash line of the matrix

Lawrence is analyzing the nature of its cash flows to formulate a proposal for a new credit management policy.

The pattern of its sales is as follows: January through July and December at $1,000,000; August at $2,000,000, September and November $3,000,000, and October at $4,000,000.

Cash received on sales amounts to 10 percent in the current month of sales, 70 percent in the month following the sales.

Obligations for labor, both direct and indirect, incurred each month are $10,000 per month plus 20 percent of sales in the current month plus 10 percent of sales in the following month.

Raw materials purchases are $30,000 plus 20 percent of next month's sales.

Salaries for general administrative expenses are $6000 per month.

Selling expenses are 10 percent of current monthly sales.

Depreciation charges are $5000 per month.

Estimated quarterly income tax payments of $11,000 are paid in January, April, July, and October and are one-fourth of the estimated annual current profits.

1. Cash on hand on January 1 is $50,000.

2. A minimum cash balance of $20,000 needs to be maintained for transaction purposes.

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Solution Summary

This is a case studying deriving cash budgets, the amount of bank debt needed, and the amount of surplus cash flow generated based on a new credit management policy.

Solution provided by:
Manal Elkhoshkhany, MBA
Education
  • BA, Ain Shams University, Cairo Egypt
  • MBA, California State University, Sacramento
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