HSA 6175 Financial Management Of Health Systems Assignment 5

Hsa 6175 Financial Management Of Health Systemsassignment 5

Consider the following cash budgeting example for Buckeye Pharmaceutical Company. After referring to the information provided below, prepare a cash budget for the company for the period July to December 2010. All dollar amounts are in thousands. 1. Gross sales by month · May 2010 $ 5,000 · June 5,000 · July 10,000 · August 15,000 · September 20,000 · October 10,000 · November 10,000 · December 5,000 · January. All sales transactions are on credit, with historical data showing that 30% of current revenues are collected in the current month, 50% in the next month and 20% in the second month after sale. Assume that bad debt is negligible. 3. Except for supplies, assume that operating expenses are paid during the month they are incurred. Operating expenses (monthly unless indicated otherwise) for the period are as follows: · Wages and salaries: $ 750 · Insurance: 250 · Depreciation: 300 · Other expenses: 3,000 · Taxes (paid in Sep. and Dec.): 500 · Payment for capital equipment in Oct.: 1,000 · Supplies purchases in a month must equal 70% of the projected gross sales for the following month. Supplies are paid for in the month after purchase. 4. The corporation must maintain an ending cash balance of $3,500 each month and meets a cash shortfall through a short-term loan. (Ignore interest for purposes of this example.) For simplicity in this example, assume that excess cash remains as cash (i.e., is not reinvested). Assume that at the beginning of July, the company had a cash balance of $3,500 with no short-term loan outstanding. Rubrics: Submission 50% Inflows calculation 15% Outflows calculation 15% Budget - worksheet 20%

Paper For Above instruction

The task of preparing a detailed cash budget for Buckeye Pharmaceutical Company from July to December 2010 requires careful analysis of the provided sales, collection patterns, operating expenses, and other outflows. Cash budgets are critical financial tools that enable organizations to forecast cash inflows and outflows, ensuring liquidity and efficient resource management. This paper discusses the step-by-step process of constructing this cash budget, emphasizing the importance of understanding sales collection cycles, expense payments, and maintaining minimum cash balances.

Understanding Sales and Collection Patterns

One of the fundamental components of the cash budget is estimating cash inflows, primarily from sales collections. In this case, all sales are credit-based, with specific collection percentages assigned to current, next, and second months after sale. Specifically, 30% of current revenues are collected in the same month, 50% in the following month, and 20% in the subsequent month. Applying these percentages to historical sales data allows for precise calculation of monthly cash collections.

For instance, July sales of $10,000 will generate cash inflows as follows: 30% in July ($3,000), 50% from June's sales ($2,500), and 20% from May's sales ($1,000). Similar calculations are performed for each subsequent month, ensuring a comprehensive view of expected cash receipts in each period.

Estimating Cash Outflows

Outflows encompass operating expenses, supplies, capital expenditures, taxes, and other payments. Operating expenses largely occur within the month incurred, such as wages, insurance, depreciation (a non-cash expense), and other operating costs. Specific outflows include wages and salaries of $750, insurance of $250, and other expenses totaling $3,000 monthly. Taxes are paid semi-annually, specifically in September and December, with a payment of $500 each period.

Supplies purchases are tied to sales projections for the following month, amounting to 70% of next month’s gross sales. Due to the payment lag, supplies purchased in one month are paid in the subsequent month, affecting cash disbursements accordingly.

Additional outflows include capital equipment payments made in October ($1,000), which significantly impact cash flow during that period.

Maintaining Cash Balance and Managing Shortfalls

The firm maintains a minimum cash balance of $3,500 at the end of each month. If projected cash inflows and outflows result in a shortfall below this threshold, the company obtains a short-term loan to cover the deficit. For simplicity, interest costs are ignored as per the instructions. The initial cash balance is $3,500, with no outstanding loans at the start of July.

Constructing the budget involves starting with the opening balance, adding cash receipts, deducting cash disbursements, and then adjusting for any shortfalls to meet the minimum cash requirement. Excess cash, if any, remains idle and is not reinvested.

Conclusion

Developing this cash budget demands meticulous calculation of expected inflows from collections, detailed estimation of outflows for operating expenses, supplies, taxes, and capital expenditures, and a strategic approach to maintaining liquidity through short-term borrowing when necessary. Such planning ensures financial stability and operational continuity for Buckeye Pharmaceutical Company, illustrating the importance of cash budgeting in healthcare and pharmaceutical financial management. Proper execution of this process enables proactive cash management, supports strategic decision-making, and optimizes organizational performance.

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