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Prepare a cash budget based on the provided sales, collections, and disbursement data. The sales are divided into cash sales and credit sales, with cash sales collected in the same month. Credit sales are collected at different rates over three months. Compute the total collections from credit sales and determine the cash available each month after disbursements. Address the shortfall in cash balance in February and March, and plan for a loan in February to maintain the desired ending balance, including repayment strategies.

Paper For Above instruction

The preparation of a cash budget is a crucial financial planning tool that assists organizations in managing liquidity, ensuring sufficient cash flow to meet operational needs, and avoiding shortfalls. In this context, Felasco Nurseries’ Southern Division requires a detailed cash budget for the quarter ending March 31, 20xx. This involves analyzing sales data, collection patterns, disbursements, and planning financing activities to manage cash shortfalls effectively.

Introduction

A cash budget provides an estimate of cash inflows and outflows for a specific period, enabling management to plan and control cash resources efficiently. It allows the identification of periods where cash shortfalls or surpluses might occur, facilitating proactive measures such as securing short-term financing or investing excess cash.

Sales Data and Collection Patterns

The sales for Felasco Nurseries’ Southern Division have been divided into cash and credit sales. In the month of sale, 40% of total sales are cash sales, which are fully collected within the same month. The remaining 60% are credit sales, collected in subsequent months at specified rates: 30% in the month of sale, 60% in the following month, and 8% in the third month. This collection pattern is standard in cash flow projections, allowing for precise estimation of incoming cash from credit sales over a moving quarterly window.

Monthly Sales and Collections

The sales figures, although not fully provided here, are summarized with cash sales and collections from credit sales as follows: For November, December, January, February, and March, total sales and respective collections are calculated based on the given percentages. For instance, in November, credit sales amount to $28,680, with collections totaling $28,560 as per the collection pattern. Similar calculations are made for subsequent months, with total collections accumulated each month, ensuring accurate cash inflow estimations.

Cash Disbursements

The company's disbursements include purchases, salaries and wages, utilities, collection fees, rent, supplies, small tools, and miscellaneous expenses. The total disbursements for each month are summed up, amounting to $130,760 for the quarter. These outflows are deducted from the cash available each month to determine the ending cash balance, which is critical for maintaining liquidity.

Analysis of Cash Position

Initial cash balance at the beginning of the quarter is $9,600. Monthly cash collections and disbursements are analyzed to ascertain ending balances. Notably, the cash balance shows a deficit in February and March, indicating a need for external financing to sustain operations and meet the desired ending balance levels.

Cash Shortfalls and Financing Plan

In February, Felasco Nurseries anticipates a shortfall, necessitating a loan of $9,000 to achieve a minimum ending cash balance of $6,000. The cash flow analysis confirms that without external funding, the estimated cash position would fall below the target. The plan involves obtaining a short-term loan of $9,000 in February, which will bridge the financing gap.

Loan Repayment Strategy

The company plans to repay part of the loan in March, specifically $5,000, reducing the outstanding debt and ensuring financial health. This repayment will be scheduled considering the cash inflows and maintaining sufficient liquidity to meet ongoing operational expenses.

Conclusion

By projecting cash inflows from collections and outflows for disbursements, Felasco Nurseries can effectively manage its liquidity across the quarter. The strategic plan for external borrowing and repayment aligns with the goal of maintaining a minimum cash balance and ensuring operational stability. Accurate cash budget planning thus plays an integral role in the financial management and decision-making process of the company.

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