Given The Following Information
Given The Following Informationsalesjune200000july200000august200
Given the following information: Sales June $200,000 July 200,000 August 200,000 September 300,000 October 500,000 November 200,. 70% of the sales are for credit and are collected one month after the sale. Other receipts: $50,000 in October - Variable disbursements: 60% of sales each month - Other disbursements: $10,000 a month - $80,000 for taxes in August - $400,000 for debt repayment in November - Beginning cash: $50,000 - Desired cash: $10,000 Prepare a monthly cash budget for this firm.
Paper For Above instruction
A comprehensive cash budget is an essential financial tool that helps firms forecast their cash inflows and outflows over a specific period, enabling effective liquidity management and strategic planning. This paper constructs a monthly cash budget for the given firm, incorporating sales data, collection patterns, additional receipts, disbursements, and other relevant financial activities to determine the cash position for each month and ensure that the firm maintains its desired cash balance.
Sales and Collection Patterns:
The firm’s sales figures are provided for five months, starting from June with $200,000 and peaking in October at $500,000. It is specified that 70% of sales are credit sales, collected one month after the sale. Therefore, cash receipts from credit sales for a particular month are based on the sales from the previous month, multiplied by 70%. Cash sales, which are collected in the same month, are not explicitly specified; hence, it is assumed all sales are credit sales for simplicity, or that cash collections follow the described pattern without explicit cash sales.
Other Receipts and Disbursements:
Additional receipts include $50,000 in October, which could be from miscellaneous sources, investments, or other income streams. Disbursements consist of variable expenses amounting to 60% of each month’s sales, other fixed disbursements of $10,000 monthly, taxes of $80,000 in August, and debt repayment of $400,000 in November.
Beginning and Desired Cash Balances:
The firm starts with an initial cash balance of $50,000 and aims to maintain a minimum cash balance of $10,000 throughout the period.
Construction of the Cash Budget:
The cash budget is built month-by-month, calculating total cash inflows, subtracting total cash outflows, and adjusting for the beginning cash balance to determine the ending cash balance. If the ending cash balance falls below the desired minimum, the firm may need to plan for financing or adjustments, but for simplicity, this budget assumes no additional financing.
June:
- Inflows:
- Cash sales (assumed 30% of June sales or cash sales if specified, but here, since only credit collections are specified, collections are from May which is unknown; assuming all collections come from the credit sales of the previous month—so no collections this month)
- Collection from May sales (unknown, so considered 0)
- No additional receipts
- Outflows:
- Variable disbursements: 60% of June sales = 0.6 * $200,000 = $120,000
- Fixed disbursements: $10,000
- Taxes: none in June
- Ending Cash:
- Beginning cash: $50,000
- Cash inflow: 0 (assuming no collections)
- Cash outflows: $120,000 + $10,000 = $130,000
- Ending cash: $50,000 - $130,000 = -$80,000, which indicates a shortfall, but for a basic budget, we record this.
July:
- Inflows:
- Collection from June sales: 70% of June sales = 0.7 * $200,000 = $140,000
- Other receipts: $0 (none specified for July)
- Outflows:
- Variable disbursements: 0.6 * $200,000 = $120,000
- Fixed disbursements: $10,000
- Ending Cash:
- Starting cash: $50,000 (from previous month)
- Inflows: $140,000
- Outflows: $130,000
- Ending cash: $50,000 + $140,000 - $130,000 = $60,000
August:
- Inflows:
- Collection from July sales: 0.7 * $200,000 = $140,000
- Outflows:
- Variable disbursements: 0.6 * $200,000 = $120,000
- Fixed disbursements: $10,000
- Taxes: $80,000
- Ending Cash:
- Starting cash: $60,000
- Inflows: $140,000
- Outflows: $130,000 + $80,000 = $210,000
- Ending cash: $60,000 + $140,000 - $210,000 = -$10,000, which indicates a potential shortfall but is recorded for planning.
September:
- Inflows:
- Collection from August sales: 0.7 * $200,000 = $140,000
- Outflows:
- Variable disbursements: 0.6 * $300,000 = $180,000
- Fixed disbursements: $10,000
- Ending Cash:
- Start: -$10,000
- Inflows: $140,000
- Outflows: $190,000
- Ending cash: -$10,000 + $140,000 - $190,000 = -$60,000
October:
- Inflows:
- Collection from September sales: 0.7 * $300,000 = $210,000
- Other receipts: $50,000
- Outflows:
- Variable disbursements: 0.6 * $500,000 = $300,000
- Fixed disbursements: $10,000
- Debt repayment: $400,000
- Ending Cash:
- Start: -$60,000
- Inflows: $210,000 + $50,000 = $260,000
- Outflows: $310,000
- Ending cash: -$60,000 + $260,000 - $310,000 = -$110,000
November:
- Inflows:
- Collection from October sales: 0.7 * $500,000 = $350,000
- Outflows:
- Variable disbursements: 0.6 * $200,000 = $120,000
- Fixed disbursements: $10,000
- Additional Outflows:
- Debt repayment: $400,000 (already accounted for; assuming it’s a separate outflow)
- Ending Cash:
- Start: -$110,000
- Inflows: $350,000
- Outflows: $130,000 + $400,000 = $530,000
- Ending cash: -$110,000 + $350,000 - $530,000 = -$290,000
Analysis and Recommendations:
The cash budget reveals consistent cash shortfalls across the months, particularly during August through November. The firm must consider financing options to cover deficits or adjust disbursements to ensure liquidity. Strategies could include delaying debt repayment, increasing collection efforts, accelerating receivables, or reducing variable and fixed expenses. Maintaining minimum cash balances is critical; thus, proactive cash management and possibly, external financing, would be necessary to sustain operations.
In conclusion, constructing a cash budget involves careful analysis of sales, collection patterns, receipts, disbursements, and beginning cash balances. Given the significant shortfalls projected, operational adjustments and financial planning are essential for the firm’s stability. Regular updates and monitoring can help to manage liquidity effectively and support strategic decision-making.
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