Question

Multiple cash budgets Scenario analysis Brownstein, Inc., expects sales of $101,000 during each of the next 3 months. It will make monthly purchases of $58,000 during this time. Wages and salaries are $20,000 per month plus 6% of sales. Brownstein expects to make a tax payment of $16,000 in the next month and a $10,000 purchase of fixed assets in the second month and to receive $8,000 in cash from the sale of an asset in the third month. All sales and purchases are for cash. Beginning cash and the minimum cash balance are assumed to be zero. a. Construct a cash budget for the next 3 months b. Brownstein is unsure of the sales levels, but all other figures are certain. If the most pessimistic sales figure is $79,000 per month and the most optimistic is $118,000 per month, what are the monthly minimum and maximum ending cash balances that the firm can expect for each of the 1-month periods? e. Briefly discuss how the financial manager can use the data in parts a. and b. to plan for financing needs.

Answer 1

Cash budget
Particulars	1st month($)	2nd month($)	3rd month($)
Sales	101,000	101,000	101,000
Sales of assets	-	-	8,000
Total receipt	101,000	101,000	109,000
Purchase	58,000	58,000	58,000
Wages and salaries[20,000+(sales×6%)] =[20,000+(101,000×6%)]=[(20,000+6,060)]=$26,060.	26,060	26,060	26,060
Tax	16,000	-	-
Purchase of fixed Assets	-	16,000	-
Total expenses	100,060	94,060	84,060
Net cash flow	940	6,940	24,940
Add: Beginning cash	0	940	7,880
Ending cash	940	7,880	32,820

b) pessimistic cash budget optimistic cash budget

Particulars	Pessimistic			Optimistic
	1st month($)	2nd month($)	3rd month($)	1st month($)	2nd month($)	3rd month ($)
Sales	79,000	79,000	79,000	118,000	118,000	118,000
Sales of Assets	-	-	8,000	-	-	8,000
Total Receipt	79,000	79,000	87,000	118,000	118,000	126,000
Purchase	58,000	58,000	58,000	58,000	58,000	58,000
Wages and salaries	26,060	26,060	26,060	26,060	26,060	26,060
Tax	16,000	-	-	16,000	-	-
Purchase of fixed Assets	-	10,000	-	-	10,000	-
Total expenses	100,060	94,060	84,060	100,060	94,060	84,060
Net cash flow	(21,060)	(15,060)	2,940	17,940	23,940	41,940
Add: Beginning cash balance	0	(21,060)	(36,120)	0	17,940	41,880
Ending cash balance	(21,060)	(36,120)	(33,180)	17,940	41,880	83,820.

C) from a) finance manager may utilise excess cash into investment in short term deposit or marketable securities.

From b) according to pessimistic cash budget firm need to borrow upto 35,000 from external source in order to maintain smooth flow of cash .

Optimistic cash budget depicted that the brownstein inc. can Investment more than $10,000 in short term investment. As there is no short fall of cash inflow. No borrowing is require to make payment.