Start with the partial model in the file Ch16 P18 Build a Model.xls on the textbook's Web site. Rusty Spears, CEO of Rusty's Renovations, a custom building and repair company, is preparing documentation for a line of credit request from his commercial banker. Among the required documents is a detailed sales forecast for parts of 2014 and 2015:
Cash $ 100 Accounts payable $ 600
Accounts receivable 300 Bank loans 700
Inventory 1,400 Accruals 200
Current assets $1,800 Current liabilities $1,500
Land and buildings 600 Mortgage on real estate 700
Equipment 600 Common stock, $0.10 par 300
Retained earnings 500
Total assets $3,000 Total liabilities and equity $3,000
Sales Labor and Raw Materials
May 2014 $60,000 $75,000
June 100,000 90,000
July 130,000 95,000
August 120,000 70,000
September 100,000 60,000
October 80,000 50,000
November 60,000 20,000
December 40,000 20,000
January 2015 30,000 NA
Estimates obtained from the credit and collection department are as follows: collections within the month of sale, 15%; collections during the month following the sale, 65%; collections the second month following the sale, 20%. Payments for labor and raw materials are typically made during the month following the one in which these costs were incurred. Total costs for labor and raw materials are estimated for each month as shown in the table.
General and administrative salaries will amount to approximately $15,000 a month; lease payments under long-term lease contracts will be $5,000 a month; depreciation charges will be $7,500 a month; miscellaneous expenses will be $2,000 a month; income tax payments of $25,000 will be due in both September and December; and a progress payment of $80,000 on a new office suite must be paid in October.
Cash on hand on July 1 will amount to $60,000, and a minimum cash balance of $40,000 will be maintained throughout the cash budget period.
a. Prepare a monthly cash budget for the last 6 months of 2014.
b. Prepare an estimate of the required financing (or excess funds)-that is, the amount of money Rusty's Renovations will need to borrow (or will have available to invest)- for each month during that period.