Cash budgeting Avallone’s Pool Services Co. had sales of $2 million in March and

ID: 2772239 • Letter: C

Question

Cash budgeting

Avallone’s Pool Services Co. had sales of $2 million in March and $2.2 million in April. Expected sales for the next three months are $2.4 million, $2.5 million, and $2.7 million. Avallone’s has a cash balance of $200,000 on May 1 and does not want its balance to dip below that level. Prepare a cash budget for May, June, and July given the following information:

Of total sales, 30% are for cash, 50% are collected in the month after the sale, and 20% are collected two months after the sale.

Avallone’s has cash receipts from other sources of $100,000 per month.

The firm expects to purchase items for $2 million in each of the next three months. All purchases are paid for in cash.

Avallone’s has fixed cash expenses of $150,000 per month and variable cash expenses equal to 5% of the previous month’s sales.

Avallone’s will pay a cash dividend of $300,000 in June.

The company must make a $250,000 loan payment in June.

Avallone’s plans to acquire fixed assets worth $500,000 in July.

Avallone’s must make a tax payment of $225,000 in June.

Explanation / Answer

Cash Budget for Avallone's Pool Service Co

May June July

Opening balance on 1st May (D) 200000 260000 -295000

Estimated Sales 2400000 2500000 2700000

Current Month - 30% 2400000*30% 2500000*30% 2700000*30%

A 720000 750000 810000

Previous Month - 50% 2200000*50% 2400000*50% 2500000*50%

B 1100000 1200000 1250000

Two months before - 20% 2000000*20% 2200000*20% 2400000*20%

C 400000 440000 480000

Total Cash from sales (A+B+C) 2220000 2390000 2540000

Cash receipts from other sources 100000 100000 100000

Total Cash receipts (E) 2320000 2490000 2640000

Cash purchases 2000000 2000000 2000000

Fixed Cash expense 150000 150000 150000

Variable Cash Expense - 5% of previous

month sale 2200000*5% 2400000*5% 2500000*5%

110000 120000 125000

Cash Dividend 300000

Loan payment 250000

Fixed Asset purhased 500000

Tax Payment 225000

Total Cash Disbursal (F) 2260000 3045000 2775000

Closing balance (D+E-F) 260000 - 295000 - 430000

As can be seen above, in the month of June there is a negative balance of 295000 and 430000 in July . Avallone Pool is desirous of maintain a 200000 balance at the end of every month. To do so it will have to take a loan of (295000 + 200000) = 495000 in June and (430000 +200000 - 495000) = 135000 in July to meet all its cash expenses and maintain a balnace of 200000 at the end of the month.

The revised cash budget will be as follows :

Revised Cash Budget for Avallone's Pool Service Co