Does the cash budget based on the given parameters provide the firm with the liq
ID: 2472361 • Letter: D
Question
Does the cash budget based on the given parameters provide the firm with the liquidity in needs in meeting operations for the quarter (and why)?
Cash Collections Schedule
May
June
July
August
September
Sales
$ 15,000
$ 16,000
$ 18,000
$ 24,000
$ 28,000
Cash
30%
$ 4,500
$ 4,800
$ 5,400
$ 7,200
$ 8,400
Credit
70%
$ 10,500
$ 11,200
$ 12,600
$ 16,800
$ 19,600
A/R Schedule
From credit sales
May
June
July
August
September
May
$ 2,100
$ 7,350
$ 1,050
June
$ 2,240
$ 7,840
$ 1,120
July
$ 2,520
$ 8,820
$ 1,260
Aug
$ 3,360
$ 11,760
Sept
$ 3,920
Total Cash Collections
$ 2,100
$ 9,590
$ 11,410
$ 13,300
$ 16,940
Cash Sales
$ 4,500
$ 4,800
$ 5,400
$ 7,200
$ 8,400
Total Cash Collected
$ 6,600
$ 14,390
$ 16,810
$ 20,500
$ 25,340
What is the impact of interest rate changes on the a) the budget as proposed, and b) the CFOs request for higher minimum cash balance?
Cash Collections Schedule
May
June
July
August
September
Sales
$ 15,000
$ 16,000
$ 18,000
$ 24,000
$ 28,000
Cash
30%
$ 4,500
$ 4,800
$ 5,400
$ 7,200
$ 8,400
Credit
70%
$ 10,500
$ 11,200
$ 12,600
$ 16,800
$ 19,600
A/R Schedule
From credit sales
May
June
July
August
September
May
$ 2,100
$ 7,350
$ 1,050
June
$ 2,240
$ 7,840
$ 1,120
July
$ 2,520
$ 8,820
$ 1,260
Aug
$ 3,360
$ 11,760
Sept
$ 3,920
Total Cash Collections
$ 2,100
$ 9,590
$ 11,410
$ 13,300
$ 16,940
Cash Sales
$ 4,500
$ 4,800
$ 5,400
$ 7,200
$ 8,400
Total Cash Collected
$ 6,600
$ 14,390
$ 16,810
$ 20,500
$ 25,340
Explanation / Answer
Ans 1 Cash budget contains only the gross cash flow from customers and cash sales , it does not include the propsed payment details for operations and additional capital expenditure. Hence cash budget prepared only on these line will not able to provide the measure of liquidity. Ans 2 a Any additional Debt funding (Working capital Loan would become cheaper or costlier depending up on the interest rate change) Ans 2 b Any increase in the interest rate would make the minimum cash balance to be lowered to make additional income from making investment out of surplus funds.
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