Problem 16-14
Cash Budgeting
Dorothy Koehl recently leased space in the Southside Mall andopened a new business, Koehl's Doll Shop. Business has been good,but Koehl frequently run out of cash. This has necessitated latepayment on certain orders, which is beginning to cause a problemwith suppliers. Koehl plans to borrow from the bank to have cashready as needed, but first she needs a forecast of how much sheshould borrow. Accordingly, she has asked you to prepare a cashbudget for the critical period around Christmas, when needs will beespecially high.
Sales are made on a cash basis only. Koehl's purchases must bepaid for during the following month. Koehl pays herself a salary of$4,000 per month, and the rent is $2,800 per month. In addition,she must make a tax payment of $13,000 in December. The currentcash on hand (on December 1) is $450, but Koehl has agreed tomaintain an average bank balance of $4,500 - this is her targetcash balance. (Disregard the amount in the cash register, which isinsignificant because Koehl keeps only a small amount on hand inorder to lessen the chances of robbery.)
The estimated sales and purchases for December, January, andFebruary are shown below. Purchases during November amounted to$100,000.
| Sales | Purchases |
| December | $140,000 | | $30,000 | |
| January | 42,000 | | 30,000 | |
| February | 54,000 | | 30,000 | |
- Prepare a cash budget for December, January, and February.
| I. Collections and Purchases: |
| | | |
| Sales | $ | $ | $ |
| Purchases | $ | $ | $ |
| Payments for purchases | $ | $ | $ |
| Salaries | $ | $ | $ |
| Rent | $ | $ | $ |
| Taxes | $Â Â | --- | --- |
| Total payments | $ | $ | $ |
| Cash at start of forecast | $ | --- | --- |
| Net cash flow | $ | $ | $ |
| Cumulative NCF | $ | $ | $ |
| Target cash balance | $ | $ | $ |
| Surplus cash or loans needed | $ | $ | $ |
- 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 thecompany's loan requirements be at the end of December in this case?(Hint: The calculations required to answer this part areminimal.)
