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Cash Budgeting - Requesting a Line of Credit

Helen is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2003 and 2004:

May 2003 $180,000
June 180,000
July 360,000
August 540,000
September 720,000
October 360,000
November 360,000
December 90,000
January 2004 180,000

Collection estimates obtained from the credit and collection department are as follows:

Collections within the month of sale 10%
Collections the month following the sale 75%
Collections the second month following the sale 15%

Payments for labor and raw materials are typically made during the month following the one in which these costs have been incurred.

Total labor and raw materials costs are estimated for each month as follows:

May 2003 $ 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 will amount to approximately $27,000 / month
Lease payments under long-term lease contracts will be $9,000 / month
Depreciation charges will be $36,000 / month
Income tax payments of $63,000 will be due in both September & December
Progress payment of $180,000 on a new design studio must be paid in October
Cash on hand on July 1st will amount to $132,000
Minimum cash balance of $90,000 will be maintained throughout the cash budget period

a) Prepare a monthly cash budget for the last 6 months of 2003.
b) Prepare an estimate of the required financing (or excess funds); that is, the amount of money Helen will need to borrow (or will have available to invest); for each month during that period.
c) Assume that receipts from sales come in uniformly during the month; that is, cash receipts come in at the rate of 1/30 each day, but all outflows are paid on the 5th of the month. Will this have an effect on the cash budget. In other words, would the cash budget you have prepared be valid under these assumptions? If not, what can be done to make a valid estimate of peak financing assumptions? No calculations are required, although calculations can be used to illustrate the effects.
d) Helen produces on a seasonal basis, just ahead of sales. Without making any calculations, discuss how the company's current ratio and debt ratio would vary during the year assuming all financial requirements were met by short-term bank loans. Could changes in these ratios affect the firm's ability to obtain bank credit?

Solution Summary

Based on a case study, this response discusses the preliminary financing state one needs to be in to apply for a line of credit at the bank.