Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977



Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
Textbook Problem

CASH BUDGETING Helen Bowers, owner of Helen’s Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2015 and 2016:

May 2015 $180,000
June 180,000
July 360,000
August 540,000
September 720,000
October 360,000
November 360,000
December 90,000
January 2016 180,000

Estimates regarding payments obtained from the credit department are as follows: collected within the month of sale, 10%; collected the month following the sale, 75%; collected the second month following the sale, 15%. Payments for labor and raw materials are made the  month after these services were provided. Here are the estimated costs of labor plus raw materials:

May 2015 $90,000
June 90,000
July 126,000
August 882,000
September 306,000
October 234,000
November 162,000
December 90,000

General and administrative salaries are approximately $27,000 a month. Lease payments under long-term leases are $9,000 a month. Depreciation charges are $36,000 a month. Miscellaneous expenses are $2,700 a month. Income tax payments of $63,000 are due in September and December. A progress payment of $180,000 on a new design studio must be paid in October. Cash on hand on July 1 will be $132,000, and a minimum cash balance of $90,000 should be maintained throughout the cash budget period.

  1. a. Prepare a monthly cash budget for the last 6 months of 2015.
  2. b. Prepare monthly estimates of the required financing or excess funds—that is, the amount of money Bowers will need to borrow or will have available to invest.
  3. c. Now suppose receipts from sales come in uniformly during the month (that is, cash receipts come in at the rate of 1 30 each day), but all outflows must be paid on the 5th. Will this affect the cash budget? That is, will the cash budget you prepared be valid under these assumptions? If not, what could be done to make a valid estimate of the peak financing requirements? No calculations are required, although if you prefer, you can use calculations to illustrate the effects.
  4. d. Bowers’ sales are seasonal; and her company produces on a seasonal basis, just ahead of sales. Without making any calculations, discuss how the company’s current and debt ratios would vary during the year if all financial requirements were met with short-term bank loans. Could changes in these ratios affect the firm’s ability to obtain bank credit? Explain.


Summary Introduction

To prepare: A monthly cash budget for the last 6 months of 2015.

Working capital:

Working capital speculation is the measure of cash, require to extend business, meet here and now business obligations and cover costs of doing business.

Cash budget:

A money spending plan is an estimation of the money inflows and outpourings for a business over a particular timeframe. This financial plan is utilized to evaluate whether the substance has adequate money to work.


Using a excel spreadsheet the monthly cash budget for the last 6 months of 2015 is as follows:

Excel Spreadsheet:


Summary Introduction

To prepare: The monthly estimated required financing or excess fund.


Summary Introduction

To determine: The effect on the cash budget, if cash budget is prepared under the assumptions and steps which make the financial requirement valid under the assumptions.


Summary Introduction

To determine: The changes in the current and debt ratio during the year with calculation and explain whether the changes in the ratios affect the ability of the firm to get bank credit.

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