Question :

The LBJ Company has budgeted sales revenues as given.

April       May      June

Credit sales         $94,000 $89,500 $75,000

Cash sales           48,000  75,000  57,000

Total sales           $142,000              $164,500              $132,000

Past experience show that 30% of the credit sales may be collected in the month of sale and the remaining 70% will be collected in the subsequent month.

Purchases of inventory are all on credit and 40 % is paid in the month of purchase and 60% in the month subsequent purchase. Budgeted inventory purchases are $195,000 in April, $135,000 in May, and $63,000 in June.

Other budgeted cash receipts: (a) sale of plant assets for $33,000 in May, and (b) sale of new general stock for $50,000 in June. Other budgeted cash disbursements: (a) operating expenses of $15,000 every month, (b) selling and administrative expenses of $10,150 each month, (c) purchase of equipment for $35,000 cash in May, and (d) dividends of $20,000 may be paid in June.

The company has a cash balance of $20,000 at the starting of May and wishes to maintain minimum cash balance of $20,000 at the end of each month. An open line of credit is available at the bank and carries an annual interest rate of 10 percent. Consider that all borrowing is done on the first day of the month in which financing is needed and that all repayments are made on the last day of the month in which excess cash is available. Also consider that there is no outstanding financing as of May 1.

Requirements:

1. Use this information to purpose a cash budget for the months of May and June, using the template provided in Doc Sharing.

2. What are the sections of a cash budget, and what is included in each section?

3. Describe why is a cash budget so vital to a company?

4. What are the basic principles of cash management that a company can follow in order to enhance its chances of having adequate cash?