Question

Problem 16-14
Cash Budgeting

Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently run out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of how much she should borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.

Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $5,000 per month, and the rent is $2,300 per month. In addition, she must make a tax payment of $12,000 in December. The current cash on hand (on December 1) is $850, but Koehl has agreed to maintain an average bank balance of $4,500 - this is her target cash balance. (Disregard the amount in the cash register, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)

The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $110,000.

	Sales		Purchases
December	$120,000		$35,000
January	42,000		35,000
February	62,000		35,000

1. Prepare a cash budget for December, January, and February.

   I. Collections and Purchases:
   	December	January	February
   Sales	$	$	$
   Purchases	$	$	$
   Payments for purchases	$	$	$
   Salaries	$	$	$
   Rent	$	$	$
   Taxes	$	---	---
   Total payments	$	$	$
   Cash at start of forecast	$	---	---
   Net cash flow	$	$	$
   Cumulative NCF	$	$	$
   Target cash balance	$	$	$
   Surplus cash or loans needed	$	$	$

   
   
2. Suppose Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company's loan requirements be at the end of December in this case? (Hint: The calculations required to answer this part are minimal.)
   $________

Answer 1

Solution A
Cash Planning	December	January	February
Sales	120,000	42,000	62,000
Less:
Purchases	(110,000)	(35,000)	(35,000)
Salary	(5,000)	(5,000)	(5,000)
Rent	(2,300)	(2,300)	(2,300)
Tax payment	(12,000)
Cash from operations	(9,300)	(300)	19,700
Cash at start of forecast	850	4,500	4,500
Net cash flow	(8,450)	4,200	24,200
Target cash balance	4,500	4,500	4,500
(Surplus cash)/loan required	12,950	300	(19,700)
Solution B
Cash Planning	December
Sales	-
Less:
Purchases	(110,000)
Salary	(5,000)
Rent	(2,300)
Tax payment	(12,000)
Cash from operations	(129,300)
Cash at start of forecast	850
Net cash flow	(128,450)
Target cash balance	4,500
Loan required	132,950