Cash Budget and External Funds Needed
Of Redbird’s sales, 20% is for cash, another 60% is
collected in the month following sale, and 20 percent is collected in the
second month following sale. November and December sales for 20X1 were $220,000
and $175,000, respectively.
Redbird purchases its raw materials two months in advance of
its sales equal to 70% of its final sales price. The supplier is paid one month
after it makes delivery. For example, purchases for April sales are made in
February, and payment is made in March.
In addition, Redbird pays $10,000 per month for rent and
$20,000 each month for other expenditures. Tax prepayments for $23,000 are made
each quarter beginning in March.
The company’s cash balance at December 31, 20X1, was
$22,000; a minimum balance of $20,000 must be maintained at all times. Assume
that any short-term financing needed to maintain cash balance would be paid off
in the month following the month of financing if sufficient funds are available.
Interest on short-term loans (12%) is paid monthly. Borrowing to meet estimated
monthly cash needs takes place at the beginning of the month. Thus, if in the
month of April the firm expects to have a need for an additional $60,500, these
funds would be borrowed at the beginning of April with interest of $605 (.12 x
1/12 x $60,500) owed for April and paid at the beginning of May.
January $100,000 May $275,000
February $110,000 June $250,000
March $130,000 July $235,000
April $250,000 August $160,000
1. Prepare a cash budget for Redbird covering the first
seven months of 2010.
2. They have $100,000 in notes payable due in July that must
be repaid, or an extension renegotiated. Will they be able to pay off the
notes?
