Neosho Concrete is attempting to estimate their financial needs for the first 6 months of 2010. Sales forecasts for 2010 are as follows:
January $50,000 May $ 80,000
February 60,000 June 120,000
March 60,000 July 125,000
April 70,000
Actual sales in 2009 were:
October $100,000
November 150,000
December 200,000
The credit department estimates the collections as follows: collections within the month of sale, 20 percent; collections the month following the sale, 40 percent; collections the second month following the sale, 40 percent.
The cost of raw materials is 40 percent of sales. Raw materials are delivered and paid for in the month prior to sale. Labor costs are 24 percent of sales and are paid for in the month of the sale. Selling, administrative, and other expenses are 16 percent of sales and are paid for in the month of the sale. All goods sold are manufactured in the month of the sale.
A new mixer with a 12-year life and no salvage value will be delivered and paid for in May. The cost of the mixer is $144,000, on which depreciation of $20,160 will be charged on June 30 (assuming the mixer falls in the MACRS 7-year class life).
Semiannual interest charges on $345,833 of long-term bonds (12 percent coupon) are due in March. Quarterly common stock cash dividends of $10,000 are paid in March and June. Income tax prepayments of $18,000 are made in March.
Cash on hand December 31, 2009, is $60,000, and a minimum cash balance of $50,000 should be maintained. All short-term borrowing is repaid as soon as cash is available. The interest rate on short-term borrowing is 12 percent per annum. All borrowing and repayments take place on the first day of the month. Interest payments are due the first day of the month following the borrowing.
Prepare a cash budget for Neosho Concrete for the first 6 months of 2010. Indicate the amount of excess cash or the amount of financing required to maintain the $50,000 minimum cash balance.
If Neosho Concrete changed all sales to a cash basis, no credit, would their outside financing needs for the cash budget period studied increase or decrease? Do not rework the problem but simply explain why it would increase or decrease.