Assume you are thinking about starting a business and would like to forecast you

Question

Assume you are thinking about starting a business and would like to forecast your cash needs for the next six months. You expect sales to be approximately $30,000 per month for the first 12 months and your purchases to support sales will be approximately 60% of sales. You anticipate about 20% of your sales will be cash and 80% collected the following month. Your supplier has agreed to extend credit for 70 days at no cost (i.e. you will pay your bills on a two month lag). Your monthly expenses for rent, wages, utilities, and so forth will be approximately $3,500 per month. You have deposited $15,000 in a checking account to begin your operations and would like to maintain a minimum balance of $5,000 in that account.

Step 2: Create a simple monthly cash budget.
Create a spreadsheet file that contains a simple monthly cash budget for the next year for the business described in the above scenario.

Step 3: Answer the questions.
Use the scenario information to help you answer these questions:

Explain the purpose of creating budgets.

Will you need additional funds at some point? Justify your answer.

Explanation / Answer

Purpose of creating budgets is to identify whether or not there could be cash shortfalls in the future and accordingly prepare for the required needs.

No there are no need of additional funds at some point in future as there is enough cash generated.

Month 0 1 2 3 4 5 6 7 8 9 10 11 12 Sales 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 30,000 cash from sales(a) 6000 30000 30000 30000 30000 30000 30000 30000 30000 30000 30000 30000 Purchases 18000 18000 18000 18000 18000 18000 18000 18000 18000 18000 18000 18000 cash from Purchases(b) -18000 -18000 -18000 -18000 -18000 -18000 -18000 -18000 -18000 -18000 rent, wages, utilities&etc(=c) -3500 -3500 -3500 -3500 -3500 -3500 -3500 -3500 -3500 -3500 -3500 -3500 Net cash(a+b+c) 2500 26500 8500 8500 8500 8500 8500 8500 8500 8500 8500 8500 checking account balance 15000 17500 44000 52500 61000 69500 78000 86500 95000 103500 112000 120500 129000 Cash need 0 0 0 0 0 0 0 0 0 0 0 0

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