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.

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

Explain the purpose of creating budgets.

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

Explanation / Answer

No additional fund is required.

Month Particulars 1 2 3 4 5 6 7 8 9 10 11 12 Opening balance-cash 15000 17500 44000 52500 61000 69500 78000 86500 95000 103500 112000 120500 Cash Sales 6000 6000 6000 6000 6000 6000 6000 6000 6000 6000 6000 6000 Collection from customers 0 24000 24000 24000 24000 24000 24000 24000 24000 24000 24000 24000 Less: Purchases 0 0 -18000 -18000 -18000 -18000 -18000 -18000 -18000 -18000 -18000 -18000 Less: Utilities expense -3500 -3500 -3500 -3500 -3500 -3500 -3500 -3500 -3500 -3500 -3500 -3500 Ending cash before borrowings 17500 44000 52500 61000 69500 78000 86500 95000 103500 112000 120500 129000

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