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.