Budgeted sales revenue for the coming five months is as follows: Month Sales rev

Question

Budgeted sales revenue for the coming five months is as follows:

Month          Sales revenue
August         $110,000
September   $105,000
October       $150,000
November    $110,000
December    $170,000

You estimate that you will collect 30% of sales revenue in the month of sale, 35% in the following month, 30% two months after the sale, and the remaining 5% three months after the sale.

Required:

a) Compute budgeted cash inflows for November and December.
November = $
December = $
(Hint: pay attention to the timing, e.g. "35% is collected in the following month" means 35% of August revenue is collected in September, i.e., cash receipts (inflows) for September include 35% of previous month's sales revenue.)

b) Is it possible for a firm to run out of cash even though it is profitable? If no, explain why not, if yes, give an example of how that can happen.

Explanation / Answer

a)cash inflows for November and December

november = 30% of sales revenue of november+ 35% of sales revenue of october +30% of september+ 5% of august

= 30/100 * 110000 + 35/100 * 150000 + 30/100 * 105000 + 5/100 *110000

=33000+ 52500 + 31500+5500

=$122,500

cashin flow for december =30% of sales revenue of december+ 35% of sales revenue of november +30% of october+ 5% of september

=30/100*170000 + 35/100 * 110000 + 30/100* 150000 + 5/100 *105000

=51000+ 38500+45000+5250

=$139,750

B) yes it is possible that firm may run out of cash even when it is profitable . thisoccurs when cash out flow may exceed cash inflow

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