Cash Budgeting Dorothy Koehl recently leased space in the Southside Mall and ope

Question

Cash Budgeting

Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl frequently run out of cash. This has necessitated late payment on certain orders, which is beginning to cause a problem with suppliers. Koehl plans to borrow from the bank to have cash ready as needed, but first she needs a forecast of how much she should borrow. Accordingly, she has asked you to prepare a cash budget for the critical period around Christmas, when needs will be especially high.

Sales are made on a cash basis only. Koehl's purchases must be paid for during the following month. Koehl pays herself a salary of $4,400 per month, and the rent is $1,500 per month. In addition, she must make a tax payment of $10,000 in December. The current cash on hand (on December 1) is $300, but Koehl has agreed to maintain an average bank balance of $5,500 - this is her target cash balance. (Disregard the amount in the cash register, which is insignificant because Koehl keeps only a small amount on hand in order to lessen the chances of robbery.)

The estimated sales and purchases for December, January, and February are shown below. Purchases during November amounted to $150,000.

Prepare a cash budget for December, January, and February.

Suppose Koehl starts selling on a credit basis on December 1, giving customers 30 days to pay. All customers accept these terms, and all other facts in the problem are unchanged. What would the company's loan requirements be at the end of December in this case? (Hint: The calculations required to answer this part are minimal.)
$

Sales Purchases December $150,000 $25,000 January 38,000 25,000 February 56,000 25,000

Explanation / Answer

I.

If customers are given 30 days credit period, money will be collected in the following month

5,500.00

Loan repaid in Feb is with the excess cash available after maintaining minimum cash balance.

Collections and Purchases: December January February Sales 1,50,000.00 38,000.00 56,000.00 Purchases 25,000.00 25,000.00 25,000.00 Payments for purchases 1,50,000.00 25,000.00 25,000.00 Salaries 4,400.00 4,400.00 4,400.00 Rent 1,500.00 1,500.00 1,500.00 Taxes 10,000.00 Total payments 1,65,900.00 30,900.00 30,900.00 Cash at start of forecast 300.00 5,500.00 5,500.00 Net cash flow -15,900.00 7,100.00 25,100.00 Cumulative NCF -15,600.00 12,600.00 30,600.00 Target cash balance 5,500.00 5,500.00 5,500.00 (Surplus) cash or loans needed 21,100.00 -7,100.00 -25,100.00 Loan taken/(Repaid) 21,100.00 -7,100.00 -14,000.00 Closing cash balance 5,500.00 5,500.00 16,600.00

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