Question: Cash flow analysis, sensitivity analysis. HealthMart is a retail store selling home oxygen equipment. HealthMart also services home oxygen equipment, for which the company bills customers monthly. HealthMart has budgeted for increases in service revenue of $200 each month due to a recent advertising campaign. The forecast of sales and service revenue for the March-June 2018 is as follows:
Almost all of the sales revenues of the oxygen equipment are credit card sales; cash sales are negligible. The credit card company deposits 97% of the revenues recorded each day into HealthMart's account overnight. For the servicing of home oxygen equipment, 60% of oxygen services billed each month is collected in the month of the service, and 40% is collected in the month following the service.
1. Calculate the cash that HealthMart expects to collect in April, May, and June 2018 from sales and service revenues. Show calculations for each month.
2. HealthMart has budgeted expenditures for May of $11,000 and requires a minimum cash balance of $250 at the end of each month. It has a cash balance on May 1 of $400.
a. Given your answer to requirement 1, will HealthMart need to borrow cash to cover its payments for May and maintain a minimum cash balance of $250 at the end of May?
b. Assume (independently for each situation) that
(1) May total revenues might be 10% lower or that
(2) total costs might be 5% higher. Under each of those two scenarios, show the total net cash for May and the amount HealthMart would have to borrow to cover its cash payments for May and maintain a minimum cash balance of $250 at the end of May. (Again, assume a balance of $400 on May 1.)
3. Why do HealthMart's managers prepare a cash budget in addition to the revenue, expenses, and operating income budget? Has preparing the cash budget been helpful? Explain briefly.