Module 3

Module 3

Practice Problem 3 - Cash Budgeting



Rusty Spears, CEO of Rusty’s Renovations, a custom building and repair company, is preparing documentation for a line of credit

request from his commercial banker. Among the required documents is a detailed sales forecast for parts of 2015 and 2016.



Estimates obtained from the credit and collection department are as follows: collections within the month of sale, 15%; collections

during the month following the sale, 65%; collections the second month following the sale, 20%. Payments for labor and raw

materials are typically made during the month following the one in which these costs were incurred. Total costs for labor and raw

materials are estimated for each month as shown in the table.



General and administrative salaries will amount to approximately $15,000 a month; lease payments under long-term lease contracts

will be $5,000 a month; depreciation charges will be $7,500 a month; miscellaneous expenses will be $2,000 a month; income tax

payments of $25,000 will be due in both September and December; and a progress payment of $80,000 on a new office suite must be

paid in October. Cash on hand on July 1 will amount to $60,000, and a minimum cash balance of $40,000 will be maintained

throughout the cash budget period.

Input Data

Collections during month of sale

Collections during month after sale

Collections during second month after sale

Lease payments

Target cash balance

General and administrative salaries

Depreciation charges

Income tax payments (Sep & Dec)

Miscellaneous expenses

New office suite payment (Oct)

Cash on hand July 1



15%

65%

20%

$5,000

$40,000

$15,000

$7,500

$25,000

$2,000

$80,000

$60,000



Sales, labor, and RM adjustment factor



Note: When the percent collected during the second

month after sale is changed, the percent for

collections during month after sale is automatically

changed so that 100% of sales are collected during

the three-month period.



0%



Prepare a monthly cash budget for the last six months of the year.



Original sales estimates

Original labor and raw mat. estimates

Forecasted Sales

Sales (gross)

Collections

During month of sale

During 1st month after sale

During 2nd month after sale