Cash Budget Assignment: Alex Plans To Start The Business

Cash Budget Assignment1alex Plans To Start The Business With Cash

Alex plans to start a business with an initial cash of $30,000 on July 1, 2012. The business involves renting a shop lot at $6,000 per quarter, payable at the start of each quarter. He intends to purchase a business car costing $80,000, making a 20% cash deposit and financing the remaining amount through a bank loan with monthly repayments of $1,000 over a period of seven years. The business will have three shop assistants earning a minimum wage of $900 plus a 5% sales commission. Since Alex is uncertain about setting the selling price, he plans to mark up costs by 100% to determine the selling price. Sales are estimated to be $30,000 in July, with 20% paid in cash, and customers will be offered a 30-day interest-free credit period.

Cash collections from credit customers will be based on the percentage of accounts receivable (A/R) collected over successive months, with a 1% to 1.5% interest charge for late payments, and a 2% uncollectible rate considered as bad debt. Sales are expected to increase by 10% monthly until September and then grow by 20% starting October. In March 2013, sales will drop by 30% and remain stable through July. Inventory purchases will ensure that opening stock each month equals 20% of that month’s sales, with all purchases made in cash until September 2012. From October 2012 onward, 60% of purchases will be on a one-month credit basis.

Cash is vital for business survival; therefore, Alex wants to maintain a minimum bank balance of $20,000 at the start of each month. Any excess cash above this amount will be transferred into fixed deposit accounts earning 12% annual interest, paid monthly. Loan interest on borrowed funds is charged at 18% annually, payable quarterly. Monthly electricity costs are estimated at $1,500, and general expenses are projected to be 10% of monthly sales. Alex will withdraw $1,500 monthly for personal use. He expects a net profit of 10% of total sales, with tax payments of 30% due on April 30, 2013, of which 50% will be paid in April, and the remaining installments in May and June.

Furthermore, he plans to acquire the shop lot, valued at $500,000, with a 5% cash deposit from the fixed deposit account and the balance financed through a loan starting January 2013, with monthly repayments of $2,800 over 25 years. Loan repayments for cash balance purposes will only be made when sufficient funds are accumulated in the fixed deposit account to cover the outstanding amount.

Paper For Above instruction

The preparation of a detailed monthly cash budget is paramount for a novice entrepreneur like Alex, who is initiating a new business venture. A cash budget provides a comprehensive overview of the anticipated cash inflows and outflows over a specific period, enabling the entrepreneur to monitor liquidity levels, plan for future cash needs, and make informed financial decisions. This proactive approach is essential for maintaining the operational stability of the business and ensuring that liquidity constraints do not impede daily activities or growth opportunities.

Creating a cash budget involves projecting sales, estimating cash collections from credit sales, and scheduling payments for expenses such as rent, salaries, purchases, and loan repayments. For Alex, understanding the timing and magnitude of these cash flows is critical, especially given his financing strategies for vehicle and property acquisitions. Variations in sales volume, credit policies, and unforeseen expenses could significantly impact cash availability, making the cash budgeting process an invaluable management tool.

Moreover, a cash budget facilitates the identification of periods where cash shortages might occur, allowing for preemptive measures such as securing short-term financing or accelerating receivables collection. It also helps in determining surplus cash that can be invested to earn additional income, as seen in Alex’s plan to deposit excess funds in fixed deposit accounts earning 12% annually. Such strategic cash management enhances the overall financial health of the business while reducing the risk of insolvency.

Furthermore, cash budgeting supports effective decision-making regarding capital expenditure, such as purchasing the shop lot and the vehicle. Knowing the forecasted cash position aids Alex in timing these investments to avoid unnecessary borrowing or liquidity crunch. It also assists in planning for tax payments and personal withdrawals, ensuring these obligations are met without disrupting business operations.

In summary, a well-structured cash budget is a fundamental financial planning tool that ensures liquidity, supports strategic investments, and enhances financial stability for a startup business. For Alex, it provides a clear financial roadmap, enabling him to navigate the uncertainties of business operations confidently and focus on growth and development.

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