Cash Budgeting Helen Bowers, owner of Helen’s Fashion Designs, is planning to re
ID: 2723598 • Letter: C
Question
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 2015 and 2016:
May (2015) 180,000
June 180,000
July 360,000
August 540,000
September 720,000
October 360,000
November 360,000
December 90,000
January (2016) 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 (2015) 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 $27,000 a month. Lease payments under long-term are $9,000 a month. Depreciation charges are $36,000 a month. Miscellaneous expenses are $2,700 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.
Question:
a. Prepare a monthly cash budget for the last 6 months of 2015.
b. 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.
c. Now suppose 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 must be paid on the 5th. 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.
d. Bowers’ sales are seasonal; and her company produces on a seasonal basis, just ahead of sales. Without making any calculations, discuss how the company’s 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 firm’s ability to obtain bank credit? Explain.
Explanation / Answer
Answer a and b
May
June
July
August
September
October
November
December
January
Cash on hand
132000
90000
90000
90000
90000
90000
Sales
180000
180000
360000
540000
720000
360000
360000
90000
180000
collection from sales
18000
153000
198000
351000
531000
657000
414000
333000
139500
10% in same month
18000
18000
36000
54000
72000
36000
36000
9000
18000
75% in next month
135000
135000
270000
405000
540000
270000
270000
67500
15% in second month
27000
27000
54000
81000
108000
54000
54000
Labour and rawmaterial
90000
90000
126000
882000
306000
234000
162000
90000
Payments in next month
90000
90000
126000
882000
306000
234000
162000
90000
General and admin salary
27000
27000
27000
27000
27000
27000
27000
27000
27000
Lease payment
9000
9000
9000
9000
9000
9000
9000
9000
9000
miss exp
2700
2700
2700
2700
2700
2700
2700
2700
2700
Income tax payment
63000
63000
Progress payment
180000
closing cash(before bank finance/investment)
201300
276300
-362700
222300
231300
159300
Closing balance required
90000
90000
90000
90000
90000
90000
Investment/(finance)
111300
186300
-452700
132300
141300
69300
Answer C
The budget we prepaired is under the assumption that all inflow as well as outflows are occuring uniformally during the month. In the given scenario since all the payments need to be paid on 5th of the month whereas corrensponding inflows will come uniformally during the month this situation will crate cashflow mismatch for the temperory period. Hence to comeup this mismatch company will have to take the shortterm finance facility from bank. In the first month company will have to take a finace of total outflow amount - 5 days receipts of cash in that month. Then the same can be repaid by end of the month then again on 5th of next month finance of outflow-5days inflow. In this way the estimate of cash budget can be prepared.
Answer d
In no seasonal period company will continue to produce the goods which will require the cash, For this requiremet company will have to take finance. Now debt will increase and debt ratio will aslo increase. Since due to production there will be increase in stock and current ratio will aslo increase which will result in working capital positive gap.
Due to seasonal business there will be working capital mismatch. On overall yearly basis the credit position of the company will be the same. In this type of scenario bank sanction the short term loans but not longterm.
May
June
July
August
September
October
November
December
January
Cash on hand
132000
90000
90000
90000
90000
90000
Sales
180000
180000
360000
540000
720000
360000
360000
90000
180000
collection from sales
18000
153000
198000
351000
531000
657000
414000
333000
139500
10% in same month
18000
18000
36000
54000
72000
36000
36000
9000
18000
75% in next month
135000
135000
270000
405000
540000
270000
270000
67500
15% in second month
27000
27000
54000
81000
108000
54000
54000
Labour and rawmaterial
90000
90000
126000
882000
306000
234000
162000
90000
Payments in next month
90000
90000
126000
882000
306000
234000
162000
90000
General and admin salary
27000
27000
27000
27000
27000
27000
27000
27000
27000
Lease payment
9000
9000
9000
9000
9000
9000
9000
9000
9000
miss exp
2700
2700
2700
2700
2700
2700
2700
2700
2700
Income tax payment
63000
63000
Progress payment
180000
closing cash(before bank finance/investment)
201300
276300
-362700
222300
231300
159300
Closing balance required
90000
90000
90000
90000
90000
90000
Investment/(finance)
111300
186300
-452700
132300
141300
69300