Rockwell Company is a fast growing company with monthly sales for the current ye

Question

Rockwell Company is a fast growing company with monthly sales for the current year estimated at a relatively steady upward trend. Past history has shown that all sales are collected within two months with negligible uncollectibles. The product for a given month is purchased partially in the month before sale and the rest during the month of sale and is paid for over a two month period. Property and income taxes are paid quarterly while other expenses are paid as incurred. The company has a desired ending cash balance for each month of $150,000 and, when necessary borrows to meet shortfalls and invests overages.

The success of the company has been sudden and Ms. Harrison, the controller, is concerned about meeting the goals of the company without getting into serious short-term financial difficulties. As a result, she has been very conscientious about preparing the cash budget and keeping it up-to-date as conditions warrant.

Required:

Why is cash budgeting important for a rapidly expanding firm such as Rockwell Company?

Explanation / Answer

Cash Budget is an important activity that helps to keep a check on day to day activity and expenses. When we keep a record of our cash in cash out then its much easier to track the cash needs. Also we can measure the liquidity of the company through the budget.

Preparing cash budget is anticipating future cash needs and cash inwards so that we can maintain the balance as to meet the requirements in an efficient way. Cash budget is helpful for each and every organisation be it a developed ones, start up or expanding one.

Now if we talk about Rockwell Company then it is almost in a growing stage and the same is showing upward steady trend, They have good collection period with approximate zero bad debt. And to avoid certain short term financial difficulties, cash budget are optimum sources.

As mentioned main taxes expenses are paid on quarterly basis then and while other expenses are paid as incurred, so here the point is that when cash is collected on2 month basis and the expenses ae paid on regular basis so sometimes it may create some issues that we are unable to pay the real sum. Its very important for the firms like Rockwell to keep an extra fund with them as they can require the finance at any time as they have to various expense schedule. The monthly cash budget is much more short-sighted and for that reason just as important in terms of planning for financial resources.

A financial statement showing the firm's planned cash inflows and cash outflows per time period and the resulting per period cash surplus or deficit. And when cash budget is maintained with optimum sight then it will provided good result helping the firm the resolve the shortfall in he finance.

To answer why these cash budgets ar important, we can count as below.

2. Cash Outflows - There can be many forms of monthly cash disbursements. Perhaps the most important one for cash planning purposes will be related to accounts payable. Like accounts receivable, a portion of purchases may be paid in cash in the month of purchase with remaining percentages paid in different times planned as per the budget. This will help to maintain a good working capital for the company.

Since Rockwell has a desiring need for having a balance of $150000, so they will maintain the cash as per the their needs. The important type of "outflow" is the firm's desired monthly minimum cash balance. The size of this balance is discretionary and is a function of the uncertainty surrounding cash inflows and outflows and the availability of ready short-term credit. It's sort of like an insurance premium to insure against the firm running out of cash unexpectedly. Firms that have stable sales with the ability to quickly borrow on a short-term basis will tend to choose larger minimum cash balances.

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