The Great Plains Medical facility had budgeted negative cash flow for the month

Question

The Great Plains Medical facility had budgeted negative cash flow for the month of March of 30,000. In the full year cash budget. February had budgeted negative cash flow of $ 47, 500 and April was negative $ 25,000. January, including insurance payments from care provided near the end of the prior year, was budgeted at break-even cash flow. All of the other months for the year were budgeted with positive cash flow.All the other monthsfor the year were budgeted with positivecash flow. At the end of the calender year on December 31,

What is the minimum level cash reserves necessary to pay operating costs of the facility without using borrowing?

Explanation / Answer

Solution:

As company is expecting negative cash flow for month of februrary, march and april and there will be no cash flow budgeted in january. Therefore in order to pay operating costs of the facility without using borrowings, company should maintain minimum cash reserve necessary to cover negative cash flow from februrary to april.

Therefore minimum level cash reserve required = $47,500 + $30,000 + $25,000 = $102,500

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