Question

This practice exercise explores simple cash budgets. Create a spreadsheet file that contains a simple monthly cash budget for the next year for the business described in the following scenario:

Assume you are thinking about starting a business and would like to forecast your cash needs for the next six months. You expect sales to be approximately $30,000 per month for the first 12 months and your purchases to support sales will be approximately 60% of sales. You anticipate about 20% of your sales will be cash and 80% collected the following month. Your supplier has agreed to extend credit for 70 days at no cost (i.e. you will pay your bills on a two month lag). Your monthly expenses for rent, wages, utilities, and so forth will be approximately $3,500 per month. Identify which of these are fixed costs and which ones are variable costs. You have deposited $15,000 in a checking account to begin your operations and would like to maintain a minimum balance of $5,000 in that account.

After building the cash budget, use it to address the following:

Explain the purpose of creating budgets and how your budget will help the business remain capitalized

Will you need additional funds at some point? Justify your answer.

How would you raise capital in the future?

Using the cash budget and answers to the above questions, create a 3-page APA-formatted paper explaining how to use the cash budget to finance the business illustrated in the scenario. Make sure to include the cash budget in an appendix.

Answer 1

Step 1

Cash budget: Cash budgeting can be defined as a budget prepare to estimate the relevant cash collection and expenses. Cash budget is very crucial for decision making process.

Step 2

Cash budget:

	1month	2nd month	3month	4month	5month	6month
Opening cash balance	$5,000	$2,500	$29,000	$25,500	$22,000	$18,500
Cash sales	6,000	6,000	6000	6000	6000	6000
Collection of credit sales		24,000	24,000	24,000	24,000	24,000
Less : due to supplier			30,000	30,000	30,000	30,000
Less: monthly expenses	$3,500	$3,500	$3500	$3500	$3500	$3500
Closing cash balance	$2500	29,000	25,500	$22,000	$18,500	$15,000

Minimum balance in account for $5000 is assumed as cash .

The purpose of creating budgets are:

• Budget helps to forecast the expenses and revenue.
• Helps to monitor the business activities.
• Budget helps to minimise risks .

Budget will help the business to remain capitalized in following ways:

• Budget allows an estimate to incur cost upon capital assets.
• Budget allows to estimate the capital requirement of a project
• Acts as a controlling measure.

For six months of period ,no additional fund is required because expenses are covered from available cash balance.

The additional capital can be introduced by way of bank loan or advance raised from bank to introduce additional capital.

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