Problem: (Preparation of a cash budget)
Projected sales for the first eight months of 2010 as follows:
January $100,000 April $300,000 July $200,000
February 120,000 May 275,000 August 180,000
March 150,000 June 200,000
collects 20 percent of its sales in the month of the sale, 50 percent in the month following the sale, and the remaining 30 percent two months following the sale. During November and December of 2003 sales were $220,000 and $175,000, respectively.
Purchases raw materials two months in advance of its sales equal to 65 percent of its final sales. The supplier is paid one month after delivery. Thus, purchases for April sales are made in February and payment is made in March.
In addition, pays $10,000 per month for rent and $20,000 each month for other expenditures. Tax prepayments of $22,500 are made each quarter beginning in March. The company's cash balance as of December 31, 2003, was $22,000; a minimum balance of $20,000 must be maintained at all times to satisfy the firm's bank line of credit agreement has arranged with its bank for short-term credit at an interest rate of 12 percent per annum (1 percent per month) to be paid monthly. Borrowing to meet estimated monthly cash needs takes place at the end of the month, and interest is not paid until the end of the following month. Consequently, if the firm were to need to borrow $50,000 during the month of April, then it would pay $500 (= .01 Ã...~ $50,000) in interest during May. Finally, follows a policy of repaying its outstanding short-term debt in any month in which its cash balance exceeds the minimum desired
balance of $20,000.
1) Company needs to know what its cash requirements will be for the next six months so that it can renegotiate the terms of its short-term credit agreement with its bank, if necessary.
To evaluate this problem, the firm plans to evaluate the impact of a Ã...}20 percent variation in its monthly sales efforts. Prepare a six-month cash budget for Harrison and use it to evaluate the firm's cash needs.
2) Company has a $200,000 note due in June. Will the firm have sufficient cash to repay the loan?