Step 1 Read the scenario. Assume you are thinking about starting a business and

Question

Step 1 Read the scenario.

Assume you are thinking about starting a business and would like to forecast your cash needs for the next six months. You expect sales to be approximately $30,000 per month for the first 12 months and your purchases to support sales will be approximately 60% of sales. You anticipate about 20% of your sales will be cash and 80% collected the following month. Your supplier has agreed to extend credit for 70 days at no cost (i.e. you will pay your bills on a two month lag). Your monthly expenses for rent, wages, utilities, and so forth will be approximately $3,500 per month. Identify which of these are fixed costs and which ones are variable costs. You have deposited $15,000 in a checking account to begin your operations and would like to maintain a minimum balance of $5,000 in that account.

Step 2 Create a simple monthly cash budget.

Create a spreadsheet file that contains a simple monthly cash budget for the next year for the business described in the above scenario.

Step 3 Answer the questions.

Use the scenario information to help you answer these questions:

Explain the purpose of creating budgets and how your budget will help the business remain capitalized

Will you need additional funds at some point? Justify your answer.

How would you raise capital in the future?

Explanation / Answer

Hope this will help you if you have any further doubt then please ask it in comments

Solution :- Sales 30000 per month Cash Sales 6000 Credit sales (80%) 24000 Purchases (60% of sales) 18000 Cash Budget Month Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec Opening Balance 15000 17500 44000 52500 61000 69500 78000 86500 95000 103500 112000 120500 Receipts Cash sales (20%) 6000 6000 6000 6000 6000 6000 6000 6000 6000 6000 6000 6000 Receipts from debtors 24000 24000 24000 24000 24000 24000 24000 24000 24000 24000 24000 Total Receipts 6000 30000 30000 30000 30000 30000 30000 30000 30000 30000 30000 30000 Payments Expenses 3500 3500 3500 3500 3500 3500 3500 3500 3500 3500 3500 3500 Purchase Payment 18000 18000 18000 18000 18000 18000 18000 18000 18000 18000 Total Payments 3500 3500 21500 21500 21500 21500 21500 21500 21500 21500 21500 21500 Net Balance 17500 44000 52500 61000 69500 78000 86500 95000 103500 112000 120500 129000 Withdrawl / Deposit 0 0 0 0 0 0 0 0 0 0 0 0 Closing Balance 17500 44000 52500 61000 69500 78000 86500 95000 103500 112000 120500 129000 Here in this wages are the variable costs and the rent expenses are the fixed cost The Budget help the business in many ways such as :- It helps to make future estimation about to expand business It helps to make expenses upto a certified limit We can easily judge the future needs of cash with this forecast No We will not need any additional funds as there is a need to maintain a minimum balance of 5000 which is always maintain We can raise the capital by showing our liquidity of the firm from this budget

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