CASH BUDGETING
Safiyyah, owner of JPIA’s Designs, is planning to request a line of credit from her bank. She has
estimated the following sales forecasts for the firm for parts of 2022 and 2023:
May 2022 P180,000
June 180,000
July 360,000
August 540,000
September 720,000
October 360,000
November 360,000
December 90,000
January 2023 180,000
Estimates regarding payments obtained from the credit department are as follows: collected
within the month of sale, 10%; collected the month following the sale, 75%; collected the second
month following the sale, 15%. Payments for labor and raw materials are made the month after
these services were provided. Here are the estimated costs of labor plus raw materials:
May 2022 P90,000
June 90,000
July 126,000
August 882,000
September 306,000
October 234,000
November 162,000
December 90,000
General and administrative salaries are approximately P27,000 a month. Lease payments
under long-term leases are P9,000 a month. Depreciation charges are P36,000 a month.
Miscellaneous expenses are P2,700 a month. Income tax payments of P63,000 are due in
September and December. A progress payment of P180,000 on a new design studio must be
paid in October. Cash on hand on July 1 will be P132,000, and a minimum cash balance of
P90,000 should be maintained throughout the cash budget period.
a. Prepare a monthly cash budget for the last 6 months of 2022.
b. Prepare monthly estimates of the required financing or excess funds—that is, the amount
of money JPIA will need to borrow or will have available to invest.
c. Now suppose receipts from sales come in uniformly during the month (that is, cash
receipts come in at the rate of 1/30 each day), but all outflows must be paid on the 5th.
Will this affect the cash budget? That is, will the cash budget you prepared be valid
under these assumptions? If not, what could be done to make a valid estimate of the
peak financing requirements? No calculations are required, although if you prefer,
you can use calculations to illustrate the effects.
Given that the above prepared budget wherein the assumption made is that all inflow and outflows are
occurring uniformly throughout the month, there is no cash budget. On the other hand, in this case, yes
this will affect the cash budget where there will be a cash flow mismatch since payments need to be paid
on fifth of the month while inflows will come uniformly during the month. Due to this, there is need for
the company to take the short- term finance facility from the bank company will have to take a finance of
total outflow amount in the first month take for example a five-day receipt of cash in that month.
Moreover, this amount can then be repaid by the end of the month and in this way the estimate of cash
budget can be prepared.
d. JPIA’s sales are seasonal; and the company produces on a seasonal basis, just ahead of
sales. Without making any calculations, discuss how the company’s current and debt ratios
would vary during the year if all financial requirements were met with short-term bank
loans. Could changes in these ratios affect the firm’s ability to obtain bank credit? Explain.
The company will continue to produce goods during the off season. Secondly, the short-term bank loan will
increase the company’s debt ratio. Thirdly, because of increase in production there will be an increase in
stock. This will in turn result in the increase in current assets thereby increasing the current ratio of the
company. Because of seasonal sales, there will be a mismatch in the company’s working capital. On overall
the credit position of the company will remain the same. However, it will only be able to obtain short term
loans but not long term ones