Digi Consulting is a relatively new firm that has a few major accounts at hand. They hire many young consultants that frequently work over time to meet clients' needs. The company is seeking a $300,000 90-day loan from its bank to help meet cash requirements in the upcoming fourth quarter of the year, which also happens to be the firm's busiest period. As Digi is a relatively new firm, the bank has requested for a cash budget for the quarter ending 31 December. The firm's finance officer provided the following data: (1) On October 1, the firm has a cash balance of $80,000. Actual and budgeted revenue from August to December are as follows: August (actual) $800,000 September (actual) $900,000 October (budgeted) $1,200,000 November (budgeted) $1,600,000 December (budgeted) $1,530,000 Based on past experience, 30% of a month's sales are collected in the month of sales, while 70% and 25% respectively of the remaining amount are collected in first and second months that follow. Thereafter, any amount remaining is deemed uncollectible. (iii) Budgeted expenses for the fourth quarter are as follows: (v) Salaries Overtime wages October November December $560,000 $620,000 $620,000 $140,000 $100,000 $80,000 $150,000 $240,000 $200,000 $30,000 $30,000 $24,000 $22,000 Advertising Insurance payments $30,000 General administration expenses $20,000 All expenses are paid in full at the end of each month. (iv) Rental is usually prepaid in the beginning of October for a quarter at the rate of $40,000 per month. Assume that the loan will be made at beginning of October and repaid at the end of December. Interest is calculated at 4% p.a. of the total loan amount and paid at the end of December.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter17: The Management Of Cash And Marketable Securities

Section: Chapter Questions

Problem 2P

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(a) Prepare a schedule of expected cash collections for October, November and December and for the quarter in total.

(b) Prepare a cash budget for the fourth quarter ended 31 December (show monthly columns and a total for the quarter).

(c) The company is considering a dividend payout of $300,000 to shareholders. If the company needs to maintain a minimum cash balance of $100,000 for operating purposes, propose and explain the month for which dividend payment should be planned.

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Digi Consulting is a relatively new firm that has a few major accounts at hand. They hire
many young consultants that frequently work over time to meet clients' needs. The
company is seeking a $300,000 90-day loan from its bank to help meet cash requirements
in the upcoming fourth quarter of the year, which also happens to be the firm's busiest
period. As Digi is a relatively new firm, the bank has requested for a cash budget for the
quarter ending 31 December. The firm's finance officer provided the following data:
On October 1, the firm has a cash balance of $80,000.
Actual and budgeted revenue from August to December are as follows:
August (actual)
$800,000
September (actual)
$900,000
October (budgeted)
(1)
(11)
$1,200,000
November (budgeted)
$1,600,000
December (budgeted) $1,530,000
(v)
Based on past experience, 30% of a month's sales are collected in the
month of sales, while 70% and 25% respectively of the remaining amount
are collected in first and second months that follow. Thereafter, any
amount remaining is deemed uncollectible.
Budgeted expenses for the fourth quarter are as follows:
October November December
$560,000 $620,000 $620,000
$100,000
$140,000
$80,000
$150,000 $240,000
$200,000
$30,000 $30,000 $30,000
$24,000
$22,000
Salaries
Overtime wages
Advertising
Insurance payments
General administration expenses $20,000
All expenses are paid in full at the end of each month.
(iv) Rental is usually prepaid in the beginning of October for a quarter at the
rate of $40,000 per month.
Assume that the loan will be made at beginning of October and repaid at
the end of December. Interest is calculated at 4% p.a. of the total loan
amount and paid at the end of December.

Definition Definition Estimate of an organization's cash flow for a future period. A cash budget forecasts future cash receipts and payments from various sources for a fiscal year. A cash budget can be created once a month or once a week to determine the organization's cash position and ensure its performance in relation to the budget. It aids in determining whether the company has enough cash and cash equivalents to meet its operational needs in the future.

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