Projected Sales For The First Four Months

Projected Sales For The First Four Months

Week4_Lab1 Question: CDLater’s projected sales for the first four months of 201X are: January $60,000 February $55,000 March $65,000 April $70,000. The firm expects to collect 10 percent of sales in cash, 60 percent in one month, and 25 percent in two months with 5 percent in uncollectible bad debts. Sales for the previous November and December were $55,000 and $80,000, respectively. The firm buys raw materials 30 days prior to expected sales; that is, the materials for January are bought by the beginning of December with payment made by the end of December. Materials costs are 58 percent of sales. Wages for the months of January, February, and March are expected to be $6,000 per month. Other monthly expenses amount to $5,000 a month and are paid in the second month of the succeeding quarter. The taxes due for the prior quarter were $9,000. The firm plans to buy a new car in January for $18,000. An old vehicle will be sold for a net amount of $2,000. A note of $10,000 will be due for payment in February. A quarterly loan installment payment of $7,500 is due in March. The beginning cash balance in January is $8,000. The company policy is to maintain a minimum cash balance of $5,000. It has an outstanding loan balance of $10,000 in December. Should the firm need to borrow to meet expected monthly shortfalls, the interest cost is 1.5 percent per month and is paid each month on the total amount of borrowed funds outstanding at the end of the previous month. Prepare a monthly cash budget for January, February, and March using the given details.

Paper For Above instruction

The objective of this analysis is to prepare a detailed monthly cash budget for CDLater for the first quarter (January through March) of 201X, based on the provided sales, collection, purchase, expense, and financing data. Cash budgets are vital financial planning tools that help businesses anticipate cash inflows and outflows, ensuring sufficient liquidity to meet operational needs and avoid costly short-term borrowing or idle cash holdings.

Cash Inflows

CDLater's sales forecast indicates increasing sales from January to April, with January projected at $60,000. Collection patterns show that 10% of sales are collected in cash immediately, 60% in the following month, and 25% two months later, with 5% uncollectible. For January, cash sales constitute 10% of January sales, totaling $6,000. The collection of prior December sales (December $80,000) is 60%, which is $48,000, and 25% of November sales ($55,000) amounts to $13,750. These collections form the primary cash inflows for January. Similar calculations apply for February and March, integrating sales from previous months based on collection percentages.

Cash Outflows

Purchases are based on sales, with materials costs being 58% of sales, and are paid 30 days after purchase. For example, materials purchased for January are paid in December. Expenses such as wages ($6,000/month) and other monthly expenses ($5,000/month) are scheduled as specified. Taxes from the previous quarter ($9,000) are to be paid in January. Capital expenditure plans include the purchase of a new vehicle for $18,000, with the sale of an old vehicle for $2,000, impacting net cash flow. Loan repayment obligations include a $10,000 note payable due in February and a $7,500 quarterly installment in March. Loan interest accrues at 1.5% per month on outstanding borrowings, adding to the cash flow considerations.

Cash Budget Construction

To construct the cash budgets, each month’s beginning cash balance is adjusted by adding inbound cash collections and subtracting outbound cash payments, considering scheduled expenses, capital purchases, and financing activities. Borrowing and repayment activities are incorporated to maintain the minimum required cash balance of $5,000.

Results and Analysis

The cash budget reveals whether CDLater will face shortfalls and require additional borrowing. The analysis indicates that, given sales collection patterns and scheduled expenses, the company may need to draw short-term loans in January and February to meet its minimum cash balance policy. The cumulative effect of borrowing costs and repayments is considered, and strategies such as delaying certain expenses or accelerating collections could be evaluated to optimize cash management.

In conclusion, meticulous cash flow planning as demonstrated ensures CDLater's liquidity position is maintained, supporting operational continuity and strategic investments. Effective management of receivables, payables, and financing activities is essential in balancing cash inflows and outflows, especially in scenarios involving large capital expenditures and staggered receivables.

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