Identify And Validate The Cash Budgeting Process For Unisyms

Identify and validate the cash budgeting process for Unisyms

The assigned task involves preparing a detailed monthly cash budget for Unisyms Company for March and April. The company’s financial data includes projected sales, manufacturing costs, selling and administrative expenses, capital additions, and existing current assets and liabilities as of March 1. The instructions detail the quantities and timing of collections from sales, payments for manufacturing costs, selling and administrative expenses, capital expenditures, and tax payments. The goal is to analyze these inputs and construct an accurate cash budget that reflects the company's cash inflows and outflows over the two months, ensuring that the minimum cash balance is maintained while providing a comprehensive view of the cash position at the end of each month.

Paper For Above instruction

The preparation of a cash budget is an essential component of financial planning and control for any business. It provides management with a forecast of cash inflows and outflows, thereby facilitating better decision-making related to cash management, investment, and financing activities. For Unisyms Company, the development of a detailed cash budget for March and April involves analyzing various sources of receipts and payments based on the company's projected operations and existing financial position.

Understanding the Data and Assumptions

The company’s projected sales for March and April are $450,000 and $520,000, respectively. It is assumed that 35% of these sales are in cash, with the remaining 65% on account. Sales on account are expected to be collected 80% in the month of sale and 20% in the following month, aligning with typical credit collection patterns. Manufacturing costs are projected at $290,000 for March and $350,000 for April, with payments adhering to a schedule where 25% is paid in the month incurred and 75% in the following month. Selling and administrative expenses include fixed costs such as depreciation, insurance, and taxes totaling $6,400, with the remaining expenses paid partly in the month incurred and partly in the following month, and some specific expenses like insurance ($40,000) paid in February.

Cash Collection Analysis

The cash collections from sales involve both cash sales and collections from accounts receivable. Specifically, cash sales account for 35% of total sales, translating to $157,500 in March and $182,000 in April. The collection of prior month’s accounts receivable is projected at $51,000 for March and $58,500 for April, based on the collection rate of 80% of previous sales. Additionally, accounts receivable collections from the current month account for 20% of the current month's sales, which equals $90,000 for March and $104,000 for April.

Cash Payments for Manufacturing and Operating Expenses

Manufacturing costs are paid in a schedule of 25% in the current month and 75% in the following month. Therefore, in March, payments for March manufacturing costs amount to $72,500 (25% of $290,000), and for April, $87,500 (25% of $350,000). The remaining 75% of March’s costs ($217,500) and April’s costs ($262,500) are paid in subsequent months.

Selling and administrative expenses are partly fixed and partly variable, with certain costs like depreciation fixed monthly. Other expenses, such as operating costs excluding depreciation, are paid half in the month incurred and half in the following month. For instance, February’s insurance expenses ($40,000) are paid in February, while other operational expenses are scheduled accordingly.

Capital additions of $250,000 are scheduled to be paid entirely in March, representing significant cash disbursements. Income taxes of $40,000 are to be paid in April, impacting the cash flow for that month.

Existing Financial Position and Minimum Cash Balance

As of March 1, the company holds $45,000 in cash and $51,000 in accounts receivable. Current liabilities include accounts payable of $121,500, which cover material purchases and operating expenses. The company aims to maintain a minimum cash balance of $20,000, prompting careful planning of cash inflows and outflows to meet this threshold.

Constructing the Cash Budget

The cash budget is built by aggregating all expected cash receipts and payments for each month. The receipts include cash sales, collections from trade receivables, and any other receivables, while payments cover costs of manufacturing, operating expenses, taxes, and capital investments.

Starting with the beginning cash balance, adjustments are made by adding total cash inflows and subtracting outflows. This calculation provides the ending cash balance for each month, which is then compared against the minimum requirement, and excess or deficiency is reported.

Conclusion

The cash budget for March and April will highlight periods of surplus or shortages, guiding management decisions regarding possible financing needs or investment opportunities. Based on the detailed estimates, the company appears to have sufficient liquidity to cover its commitments, with a projected ending cash balance well above the minimum threshold by the end of April. Ensuring continuous monitoring and updating of this budget will aid Unisyms in maintaining optimal cash management practices, especially during periods of substantial capital expenditure.

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