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Cash budget

Imagine it is July 2009 and you are a budget analyst for your company that makes seasonal items. Create a cash budget for the months July through December using the sales estimates and other information about the company given below.

Sales forecast
Month Sales (in thousands)
May 200
June 200
July 400
August 500
September 600
October 600
November 500
December 300
January 200

The company offers a 5% discount if they pay at the time of the sale. About 20% take advantage of this. Meaning for every $100 of merchandise sold, the company collects $19 in the sale month, representing 20% of the sales being sold at a 5% discount or at 95% of the full price ($100 * .2 * .95 = $19).

50% of each month's sales are collected one month after the sale, 30% are collected two months after the sale.

Raw materials are 60% of the sales. Materials are ordered two months in advance and paid in the following month. Example: materials for July are ordered in May and paid for in June.

Manufacturing labor is 20% of the sales and wages are paid for in the month of the sales. Example: Labor in July will be 20% of the July sales (.2 * $400 = 80) and is paid in July.

Managerial salaries are $30 per month.

Rent and lease payments total $15 per month.

Tax payments of $25 will be made in September and December.

The company will spend $100 for a new machine in August.

The beginning cash balance in July is $120 and the minimum cash balance the company needs is $50.

A. Month May Jun Jul Aug Sep Oct Nov Dec Jan
Sales (thousands $) 200 200 400 500 600 600 500 300 200
Cash receipts:
Total receipts

Salaries (30 in Jul, 30 in Aug already filled in)
Rent/Lease (15 in Jul, 15 in Aug already filled in)
New Machine (100 in Aug already filled in)
Total expenditures

Change in cash
Beginning cash (120 in Jul already filled in)
End cash without Loan
End cash with loan

Loan repayment
Cumulative loan

Cash surplus

B. What will the A/R balance be at the end of 2009?

C. Assume everything occurs exactly as the cash budget predicts and the company gets the loans forecast on the cash budget. Given the minimum cash balance of $50, will the company be assured that there will never be a cash shortfall at anytime during the forecast of July through December? Explain.

D. Why does this profitable company borrow money for a few months each year?

Solution Summary

The solution explains how to prepare a cash budget