A firm estimates sales of $150,000 in December, $175,000 in January; $125,000 in

Question

A firm estimates sales of $150,000 in December, $175,000 in January; $125,000 in February, $200,000 in March, $250,000 in April; $180,000 in May; and $200,000 in June. November sales were $125,000. The firm typically collect 20% of its sales in cash; 50% are accounts receivable paid the month after the sale; and 30% are accounts receivable paid two months after the sale. The firm’s cost of goods sold (raw materials) amounts to 70% of its sales. The raw materials are ordered two months in advance of expected sales, but are paid for one month after they are ordered. The firm has fixed costs of $3,000 per month for rent and $12,000 per month for other fixed operating costs. The firm has $30,000 per month in salary expense. Assume a starting cash balance of $0 but a minimum cash balance of $10,000 going forward. Prepare the cash budget for January through April. What is the maximum amount of short-term loan the firm will need during the relevant time period?

Explanation / Answer

Cash budget sales November december january feb march april may june 125000 150000 175000 125000 200000 250000 180000 200000 cash sales 35000 25000 40000 50000 Novemver 30% 37500 December 50% 30% 75000 45000 January 50% 30% 87500 52500 February 50% 30% 62500 37500 march 50% 30% 100000 60000 total cash collection 147500 157500 155000 187500 0 November december january feb march april may june cost of goods sold 70% of sales 87500 105000 122500 87500 140000 175000 126000 140000 to be ordered in 2 months in advance and payment is made in the next month of the ordered place cost or payment of raw material 122500 87500 140000 175000 126000 rent and other fixed operating expenses 15000 15000 15000 15000 salaries 30000 30000 30000 30000 total expenses 132500 185000 220000 171000 opening cash balance 15000 10000 10000 surplus or deficiency of cash 15000 -27500 -65000 16500 amount of cash borrowed 22500 65000 minimum cash balance 15000 10000 10000 10000 Maximum amount of cash borrowed 65000

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