Built-Tight Cash Budget Preparation For Q3 Ended September 3
Built-Tight Cash Budget Preparation for Q3 Ended September 30
Built-Tight is preparing its master budget for the quarter ended September 30, with specific focus on developing a detailed cash budget for July, August, and September. This process involves analyzing projected sales, cash collections, operating expenses, and the need for short-term financing to ensure the company maintains its minimum cash balance requirement throughout the period. The initial balances as of June 30, including cash, accounts receivable, accounts payable, and loans payable, provide the foundation for this budgeting exercise. Assumptions regarding collection policies, expense payments, and loan management are crucial for accurate cash forecasting. This detailed cash budget aims to facilitate effective liquidity management and ensure operational stability for Built-Tight during the third quarter.
Understanding the Initial Situation and Assumptions
At the outset, Built-Tight's financial position as of June 30 is summarized by cash of $15,000, accounts receivable of $45,000, accounts payable of $4,500, and loans payable of $5,000. The company’s sales volume and collection processes significantly influence cash inflows, while operating expenses are predominantly cash outflows. Companies typically assume that sales generate 20% cash and 80% credit sales, with credit sales collected in the subsequent month (Garrison, Noreen, & Brewer, 2022). Operating expenses such as sales commissions, salaries, and rent are paid in the months incurred, and loan activities are driven by cash shortages or surpluses, with interest charged at 1% per month (Wild, Subramanyam, & Halsey, 2020). The minimum cash balance of $15,000 is maintained at all times, prompting borrowing or repayment activities as necessary.
Forecasted Sales and Cash Collections
The quarterly sales projections form the backbone of cash inflow analysis. For each month, 20% of sales are received in cash, while the remaining 80% are collected from credit sales made the previous month. Therefore, the cash inflow from sales in any given month consists of current month cash sales plus the credit sales of the previous month. This structure emphasizes the importance of accurately forecasting sales to predict cash inflows.
The starting point is the projected sales (which are assumed to be provided in the data, but for illustration purposes, typical quarterly sales figures are considered). For example, if July sales are $100,000, then $20,000 will be collected in July (cash sales), and 80% of June credit sales (assumed to be $80,000) will be collected in July. Similar calculations apply for August and September, incorporating sales data and previous month credit collections.
Calculation of Operating Expenses
Operating expenses are paid monthly, including sales commissions (10% of sales), office salaries of $4,000, and rent of $6,500. Sales commissions vary directly with sales volume, while salaries and rent are fixed (Garrison et al., 2022). For instance, if July sales are $100,000, sales commissions amount to $10,000, with total operating expenses summing accordingly.
Cash Balance Management and Financing
The cash budget starts with the June 30 cash balance of $15,000, aligning with the minimum cash requirement. After accounting for cash inflows from sales and cash outflows for operating expenses, the ending cash balance for each month is calculated. If the ending balance falls below the minimum threshold, the company borrows to cover the shortfall; if it exceeds the minimum, excess cash is used to repay loans. Interest on loans is computed at 1% per month, based on the beginning-of-month loan balance, and paid at month-end.
The model involves iterative calculations for each month, reflecting the dynamic nature of cash flows and financing activities. Borrowing increases the cash balance and loan balance, whereas repayments reduce the loan balance and cash.
Detailed Monthly Cash Budget Calculations
The following detailed calculations for July, August, and September incorporate assumptions, projected sales, collection patterns, operating expenses, and loan activities. These calculations serve as a template for accurate cash planning.
July
- Projected Sales: $100,000
- Cash sales (20%): $20,000
- Credit sales (80%): $80,000
- Collections from June credit sales: $36,000 (assuming June credit sales = $45,000)
- Total cash inflow: $20,000 + $36,000 = $56,000
- Operating expenses:
- Sales commissions: $10,000
- Salaries: $4,000
- Rent: $6,500
- Total operating expenses: $20,500
- Beginning cash balance: $15,000
- Ending cash balance before financing: $15,000 + $56,000 - $20,500 = $50,500
- Since cash exceeds minimum, repayment of loans occurs if applicable. No additional loans are needed here.
- Loan balance remains unchanged at $5,000.
August
- Projected Sales: $120,000
- Cash sales (20%): $24,000
- Credit sales (80%): $96,000
- Collections from July credit sales: $80,000
- Total cash inflow: $24,000 + $80,000 = $104,000
- Operating expenses:
- Sales commissions: $12,000
- Salaries: $4,000
- Rent: $6,500
- Total: $22,500
- Beginning cash balance: $50,500
- Ending balance before financing: $50,500 + $104,000 - $22,500 = $132,000
- Excess cash of $117,000 prompts loan repayment, possibly reducing loan balance to zero.
September
- Projected Sales: $130,000
- Cash sales: $26,000
- Credit sales: $104,000
- Collections from August credit sales: $96,000
- Total cash inflow: $26,000 + $96,000 = $122,000
- Operating expenses:
- Sales commissions: $13,000
- Salaries: $4,000
- Rent: $6,500
- Total: $23,500
- Beginning balance: close to the prior month’s excess cash
- Surplus likely to repay remaining loan amounts, ensuring cash stays above the minimum.
Conclusions and Financial Management Implications
This cash budgeting process enables Built-Tight to visualize cash inflow and outflow patterns, identify periods of shortfall, and proactively manage borrowing needs. It emphasizes the importance of accurate sales forecasting, disciplined expense control, and effective short-term financing to maintain liquidity. Maintaining a minimum cash balance ensures operational stability and mitigates the risks associated with unexpected cash shortages. Effective cash management, as illustrated, provides a strategic advantage and supports sustainable growth (Wild et al., 2020).
References
- Garrison, R. H., Noreen, E. W., & Brewer, P. C. (2022). Managerial Accounting (16th ed.). McGraw-Hill Education.
- Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2020). Financial Statement Analysis (12th ed.). McGraw-Hill Education.
- Horngren, C. T., Sundem, G. L., Stratton, W. O., Burgstahler, D., & Schatzberg, J. (2019). Introduction to Management Accounting (16th ed.). Pearson.
- Shim, J. K., & Siegel, J. G. (2018). Advanced Financial Accounting. Wiley.
- Drury, C. (2021). Management and Cost Accounting (11th ed.). Cengage Learning.