Question 18.S-TP.2: Cash Balance for Greenwell Corporation The Greenwell Corpora...
Cash Balance for Greenwell Corporation The Greenwell Corporation has a 60-day average collection period and wishes to maintain a $160 million minimum cash balance. Based on this and the information given in the following cash budget, complete the cash budget. What conclusions do you draw?
| GREENWELL CORPORATION Cash Budget (in millions) |
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| Q1 | Q2 | Q3 | Q4 | |
| Beginning receivables | $240 | |||
| Sales | 150 | $165 | $180 | $135 |
| Cash collections |
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| Ending receivables |
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| Total cash collections | ||||
| Total cash disbursements | 170 | 160 | 185 | 190 |
| Net cash inflow |
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| Beginning cash balance | $ 45 | |||
| Net cash inflow |
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| Ending cash balance |
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| Minimum cash balance |
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| Cumulative surplus (deficit) |
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Because Greenwell has a 60-day collection period, only sales made in the first 30 days of the quarter will be collected in the same quarter. Total cash collections in the first quarter will thus equal 30/90 = 1/3 of sales plus beginning receivables, or 1/3 × $150 + $240 = $290. Ending receivables for the first quarter (and the second quarter beginning receivables) are the other 2/3 of sales, or 2/3 × $150 = $100. The remaining calculations are straightforward, and the completed budget is as follows:
| GREENWELL CORPORATION Cash Budget (in millions) |
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| Q1 | Q2 | Q3 | Q4 | |
| Beginning receivables | $240 | $100 | $110 | $120 |
| Sales | 150 | 165 | 180 | 135 |
| Cash collections | \underline{290} | \underline{155} | \underline{170} | \underline{165} |
| Ending receivables | \underline{\$100} | \underline{\$110} | \underline{\$120} | \underline{\$ 90} |
| Total cash collections | $290 | $155 | $170 | $165 |
| Total cash disbursements | \underline{ 170} | \underline{160} | \underline{185} | \underline{190} |
| Net cash inflow | \underline{ \$120} | \underline{−\$ 5} | \underline{−\$15} | \underline{−\$ 25} |
| Beginning cash balance | $ 45 | $165 | $160 | $145 |
| Net cash inflow | \underline{ 120} | \underline{− 5} | \underline{− 15} | \underline{− 25} |
| Ending cash balance | $165 | $160 | $145 | $120 |
| Minimum cash balance | \underline{− 160} | \underline{− 160} | \underline{− 160} | \underline{− 160} |
| Cumulative surplus (deficit) | $ 5 | $ 0 | −$ 15 | −$ 40 |
The primary conclusion from this schedule is that, beginning in the third quarter, Greenwell’s cash surplus becomes a cash deficit. By the end of the year, Greenwell will need to arrange for $40 million in cash beyond what will be available.