Question

Cosimo Rossi runs a small manufacturing business in Winnellie and has asked for help preparing a cash budget for July and August. He estimated that the cash balance at the end of June would be $105,000. He has provided you with a breakdown of the revenue figures for May and June and an estimate for July and August. Cash Sales Credit Sales Total May $ 110,250 157.500 June $ 106,750 192,500 July $ 126,000 227.500 August $ 105,000 140,000 $ 267.750 $ 299,250 $ 353,500 $ 245.000 He has found that his credit customers generally pay their accounts in the three months after the sale. 60 percent is collected in the month of sale, 35 percent in the following month and the balance the month after that. Cosimo has budgeted for selling and administrative expenses on a monthly basis at $154,000 a month. He will be buying and installing new equipment for $175,000. There is an initial outlay of $35,000 in July with the remainder due after installation in October. With the need to cover unexpected expenses Cosimo tries to keep a minimum cash balance of $ 105,000. He anticipates that during the dry season there will be an increase in sales and so he will need to build up his inventory levels to meet the demand. He has ordered new stock at a cost of $105,000 which will be delivered in June with settlement paid in July.

Answer 1

Solution to requirement a:

			Schedule of Cash receipts for credit sales			figures in $
Month	Credit sales		May	June	July	August	September	October
May	157,500		94,500	55,125	7,875	-	-	-
June	192,500		-	115,500	67,375	9,625	-	-
July	227,500		-	-	136,500	79,625	11,375	-
August	140,000		-	-	-	84,000	49,000	7,000
Total	717,500		94,500	170,625	211,750	173,250	60,375	7,000

Payment by credit customers in July: $211,750

Payment by credit customers in August: $173,250

Solution to Requirement b:

Cash budget
		figures in $
Particulars	July	August
Opening cash balance	105,000	148,750
Receipts:
Cash sales	126,000	105,000
Cash receipt from on account sales	211,750	173,250
Payments:
Cash paid for inventory	105,000	-
Selling and administrative expenses	154,000	154,000
Installation of new equipment	35,000	-
Closing cash balance	148,750	273,000

Solution to requirement c:

Cosimo's cash budget shows a cash balance of $148,750 at the end of July and $273,000 at the end of August. This means that he has a surplus cash in both the months as the minimum cash balance requirement is $105,000.

Since, there is a cash surplus, Cosimo can use the surplus to either:

1. Re-invest in his business and increase capacity to achieve higher profits.

2. Park the surplus funds in liquid assets to achieve an investment return till the time the surplus cash is required.