Dorothy Koehl recently leased space in the Southside Mall and opened a new busin

Question

Dorothy Koehl recently leased space in the Southside Mall and opened a new business, Koehl's Doll Shop. Business has been good, but Koehl has 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 just how much she must 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 $4,300 per month, and the rent is $2,200 per month. In addition, she must make a tax payment of $10,000 in December. The current cash on hand (on December 1) is $750, but Koehl has agreed to maintain an average bank balance of $5,500 - this is her target cash balance. (Disregard cash in the till, 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 $110,000.

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

Now, 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?

Explanation / Answer

Cash budget for December, January, and February December January February In $ In $ In $ Sales 120000 38000 68000 Purchases 40000 40000 40000 Payments for purchases 0 40000 40000 Salaries 4300 4300 4300 Rent 2200 2200 2200 Taxes 10000 0 0 Total Payments 16500 46500 46500 Cash at start of forecast 750 104250 95750 Net Cash flow 104250 95750 117250 Cumulative net cash flow 104250 200000 317250 Target Cash balance 5500 5500 5500 Surplus Cash or loans needed 98750 90250 111750 If Koehl starts selling on credit basis on December 1 giving custmers 30 days credit. In this his loan requirement at the end of December would be, December In $ Sales 0 Purchases 40000 Payments for purchases 0 Salaries 4300 Rent 2200 Taxes 10000 Total Payments 16500 Cash at start of forecast 750 Net Cash flow -15750 Cumulative net cash flow -15750 Target Cash balance 5500 Surplus Cash or loans needed -21250 Loan needed at December end = $21250

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