Question

Your company has projected the following numbers for the third quarter of the year: Month Sales May $ 70,000 June $ 90,000 July $130,000 August $120,000 September $100,000 Labor & Raw Materials Purchases $75,000 $90,000 $95,000 $70,000 $60,000 Collections occur as follows: 15% pay within the month of sale, 65% pay during the month following the sale, and 20% pay in the second month following the sale. Payments for labor and raw materials occur in the month following the purchase. Salaries and general expense run $15,000 per month, lease payments are $5,000 per month, depreciation charges are $7,500 per month, miscellaneous expense are $2,000 per month. An income tax payment of $25,000 is due in September. Cash on hand on July 1 is $25,000 and the company must maintain a minimum balance of $25,000. Prepare a cash budget for the third quarter of July, August, and September.

Answer 1

Cash Budget for the third quarter will be as follow

	July	Aug	Sept
Cash balance at the beginning of the period	25000	5000	8500
Cash Inflows:
Cash Sales (15%)	19500	18000	15000
Receivables collected for previous month (65%)	58500	84500	78000
Receivables collected for two months prior (20%)	14000	18000	26000
Total cash Inflows	92000	120500	119000
Cash Outflows:
Labor and raw material (paid a month later)	90000	95000	70000
Salaries and general expenses	15000	15000	15000
Lease payments	5000	5000	5000
Miscellenous expenses	2000	2000	2000
Income tax	-	-	25000
Total cash Outflows	112000	117000	117000
Cash surplus (deficit)	-20000	3500	2000
Cash balance at the end of the period	5000	8500	10500

Note 1 : Receivables for sales

Cash sales are calculated based on 15% of the sales of same month

Receivable for previous month is calculated based on 65% of previous months sales

Receivable for 2 month prior is calculated based on 20 of two month prior sale

	July	Aug	Sept
Cash Sales (15%)	130000*15%	120000*15%	100000*15%
Receivables collected for previous month (65%)	90000*65%	130000*65%	120000*65%
Receivables collected for two months prior (20%)	70000*20%	90000*20%	130000*20%

Note 2 : Labor and raw material

Labor and raw material are paid for previous month, that is paid for June in July and for July in August.

Note 3 : Cash balance to maintain

It is given that cash balance of 25000 must be maintained, but no information is given regards to withdrawal/deposit of additional cash or cash required and from where it should be adjusted. And also no information regarding balance should be maintained on monthly basis or on last day of quarter.

If we assume cash balance requirement is fulfilled from a bank account or an overdraft facility then this will be added to budget -

	July	Aug	Sept
Cash balance at the beginning of the period	25000	25000	25000
Cash surplus (deficit)	-20000	3500	2000
Cash balance at the end of the period	5000	28500	27000
Withdrawal/deposit from bank or overdraft (assumption)*	20000	-3500	-2000
Cash balance at the end of the period	25000	25000	25000

Note 4 : Assumption

That depreciation is not included in salaries and general expenses.

If we assume depreciation as part of salaries and general expenses then budget will be as follows

	July	Aug	Sept
Cash balance at the beginning of the period	25000	12500	23500
Cash Inflows:
Cash Sales (15%)	19500	18000	15000
Receivables collected for previous month (65%)	58500	84500	78000
Receivables collected for two months prior (20%)	14000	18000	26000
Total cash Inflows	92000	120500	119000
Cash Outflows:
Labor and raw material (paid a month later)	90000	95000	70000
Salaries and general expenses	7500	7500	7500
Lease payments	5000	5000	5000
Miscellenous expenses	2000	2000	2000
Income tax	-	-	25000
Total cash Outflows	104500	109500	109500
Cash surplus (deficit)	-12500	11000	9500
Cash balance at the end of the period	12500	23500	33000