Question

·        You need to do a cash budget forecast for Viggio for the next six months

·        From this cash budget see if Viggio may need to reuse the line of credit that the bank has set up for him.

·        If he does need to use it, how much of it will he need to borrow and what seems to be the reason that his cash flow isn't what it should be. 

Viggio Wines Cash Budget

Louis Viggio was doing something he had never done before, creating a cash budget. This process was something his banker had asked him to do before coming in to talk to her about his current line of credit with the bank.

Current Situation

Last year had been both a good and bad year for Louis. Sales were higher than they had ever been, but in spite of that the winery had run into a cash crunch in June. With the need for cash being immediate, his banker set up a line of credit of $20,000 which he used up within three months. Fortunately, that was enough to get the winery to the point where it was generating sufficient cash, but he did not want to be surprised like that again.

The banker, Cindy Gonzalez, had suggested Louis should create a cash budget for the next six months so they could sit down together and see if the winery would need more cash. She even gave him a nice pamphlet showing the basics of how to create a cash budget.

Creating the Cash Budget

Louis gathered up everything he would need, looked over the records, and starting putting together the cash budget. Probably the most important thing was estimating the sales as that determined how much cash he could expect to have coming into the winery each month. From his records he could see that only about 15% of all sales in any month were made through the tasting room and were essentially cash sales. Of all the sales made on credit, only 5% were paid for in the same month the sale was made, 49% were paid for the next month, and 42% were paid for during the following month. Total sales for the winery for November were $108,780 and for December were $155,362.

As far as expenses for the winery, Louis looked at the expenses for the previous year on a monthly basis and used those as a guide for what the upcoming expenses would be. (His pro-forma statement of sales and expenses can be found on the next page)

Determining Cash Needs

Louis had made an agreement with the bank that the winery would have a cash balance of at least $45,000 every month. The requirement for a minimum balance is not unusual when a firm has either a loan or line of credit with a bank, and Louis had both with his current bank. He had that much, plus a little bit more to start the year as his ending cash balance in the bank for December was $49,879. He also knew that he had $73,020 in monthly purchases that were outstanding and would be paid in January.

He was hoping to see what caused the cash problem last year. He had worked hard to get the line of credit paid off by the end of the year and the income statement showed the firm had a nice 6.5% net profit.

But Cindy had told him that it is not unusual for firms to show a profit, but run out of cash at times, and it is was important to determine both why it happened and how to try to deal with it so as to keep the firm’s borrowing needs reasonable.

Viggio Estimates for Next Year

	January	February	March	April	May	June
Sales	$48,866	$39,093	$39,093	$58,640	$65,155	$74,928
Monthly Purchases	$73,020	$26,876	$21,501	$21,501	$32,252	$35,835
Mortgage payment	$12,000	$12,000	$12,000	$12,000	$12,000	$12,000
Rent for storage area	$2,000	$2,000	$2,000	$2,000	$2,000	$2,000
Utilities	$2,000	$2,200	$1,800	$1,500	$2,000	$2,300
Marketing	$2,500	$2,100	$2,000	$2,200	$3,000	$2,500
Insurance	$700	$700	$700	$700	$700	$700
Salaries and Benefits	$5,000	$5,600	$5,000	$5,600	$6,400	$6,900
Website Maintenance	$500	$500	$500	$500	$500	$500
Repairs and Maintenance	$500	$500	$500	$500	$500	$500
Travel	$1,800	$800	$1,500	$1,000	$800	$800
Supplies	$400	$400	$400	$400	$400	$400
Annual Tax Payment	$28,000
Misc.	$300	$300	$300	$300	$300	$300