Solution 11/26/2018
Chapter: 16
Problem: 18
Input Data
Collections during month of sale 15%
Collections during month after sale 65%
a. Prepare a monthly cash budget for the last six months of the year.
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 for the next two years.
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.
Note: When the percent collected
Collections during second month after sale 20%
Lease payments $5,000
Target cash balance $40,000
General and administrative salaries $15,000
Depreciation charges $7,500
Income tax payments (Sep & Dec) $25,000
Miscellaneous expenses $2,000
New office suite payment (Oct) $80,000
Cash on hand July 1 $60,000
Sales, labor, and RM adjustment factor 0%
May June July August September October November December January
Original sales estimates $60,000 $100,000 $130,000 $120,000 $100,000 $80,000 $60,000 $40,000 $30,000
Original labor and raw mat. estimates $75,000 $90,000 $95,000 $70,000 $60,000 $50,000 $20,000 $20,000
Sales (gross) $60,000 $100,000 $130,000 $120,000 $100,000 $80,000 $60,000 $40,000 $30,000
During month of sale 19500 18000 15000 12000 9000 6000
During 1st month after sale 65000 84500 78000 65000 52000 39000
During 2nd month after sale 12000 20000 26000 24000 20000 16000
Purchases
Labor and raw materials $75,000 $90,000 $95,000 $70,000 $60,000 $50,000 $20,000 $20,000
Payments for labor and raw materials $90,000 $95,000 $70,000 $60,000 $50,000 $20,000
Payments
Payments for labor and raw materials 90,000 95,000 70,000 60,000 50,000 20,000
Net Cash Flows
Cash on hand at start of forecast period $60,000
Cumulative NCF: Prior month cumulative + this month’s NCF $44,500 $50,000 $52,000 ($9,000) ($0) ($6,000)
Cash Surplus (or Loan Requirement)
Target cash balance $40,000 $40,000 $40,000 $40,000 $40,000 $40,000
b. How much must Spears borrow each month to maintain the target cash balance?
Answer. Look at the “Surplus cash or loan needed” line at the bottom of the cash budget.
c. Would the cash budget be accurate if inflows came in all during the month but outflows were bunched
early in the month?
Answer: No. In the first month, only a little of the cash would have come in by the 5th, but all of the payments
would have to be made. There would be a big cash shortfall. To solve the problem, we would need a
daily cash budget.
d. If the company operates on a seasonal basis, how would this affect the current ratio and the debt ratio?
Answer: Just before the busy season, the company would have some current assets, but not very much, and it
should have very little debt. Therefore, its current ratio should be high and its debt ratio low.
General and administrative salaries 15,000 15,000 15,000 15,000 15,000 15,000
Lease payments 5,000 5,000 5,000 5,000 5,000 5,000
Miscellaneous expenses 2,000 2,000 2,000 2,000 2,000 2,000
Income tax payments 25,000 25,000
Total payments $112,000 $117,000 $117,000 $162,000 $72,000 $67,000
Answer: The “Sales adjustment factor” can be used to cause sales to vary from the base levels. Similarly, we
can change the percentage of late paying customers. Here is the relevant data table:
Change
in Sales
$49,000 0% 20% 30% 45% 60% 75% 90%
-100% $ 242,000 $ 242,000 $ 242,000 $ 242,000 $ 242,000 $ 242,000 $ 242,000
payments and administrative salaries.
Maximum Loan Required
% Collections in 2nd month