Question 18.1: Using a Cash Budget SITUATION: It is January 1, and you have...
Using a Cash Budget
SITUATION: It is January 1, and you have prepared the following cash budget for the next four months for your new business venture:
| Monthly Cash Budget | |||||
| \underline{Jan.} | \underline{Feb.} | \underline{Mar.} | \underline{ِApr.} | \underline{Total} | |
| Beginning cash balance | $0 | ($18,510) | ($25,270) | ($28,530) | |
| Cash receipts | |||||
| Cash sales | 2,500 | 5,000 | 12,000 | 20,000 | $39,500 |
| Investments by owner | \underline{– \quad \quad \quad} | \underline{– \quad \quad \quad} | \underline{– \quad \quad \quad} | \underline{– \quad \quad \quad} | \underline{– \quad \quad \quad} |
| Total cash receipts | $2,500 | $5,000 | $12,000 | $20,000 | $39,500 |
| Total cash available | $2,500 | ($13,510) | ($13,270) | ($8,530) | |
| Cash payments | |||||
| Operations | |||||
| Merchandise purchases | $1,250 | $2,500 | $6,000 | $10,000 | $19,750 |
| Gross wages and payroll | 5,760 | 5,760 | 5,760 | 5,760 | 23,040 |
| Advertising | 1,000 | 1,000 | 1,000 | 1,000 | 4,000 |
| Rent | 1,500 | 1,500 | 1,500 | 1,500 | 6,000 |
| Other expenses | \underline{1,000} | \underline{1,000} | \underline{1,000} | \underline{1,000} | \underline{4,000} |
| Operations total | $10,510 | $11,760 | $15,260 | $19,260 | $56,790 |
| Financing and investments | |||||
| Capital expenditures | $10,000 | – | – | – | $10,000 |
| Start-up costs | 500 | – | – | – | 500 |
| Withdrawals by owner | \underline{– \quad \quad \quad} | \underline{– \quad \quad \quad} | \underline{– \quad \quad \quad} | \underline{– \quad \quad \quad} | \underline{– \quad \quad \quad} |
| Total cash payments | $21,010 | $11,760 | $15,260 | $19,260 | $67,290 |
| Ending cash balance | ($18,510) | ($25,270) | ($28,530) | ($27,790) | |
If you plan to finance the business entirely with equity, how much money should you invest now to ensure that there is at least $1,000 still in the business at the end of April? How much will you have to invest each month after April to maintain a $1,000 cash balance if the cash inflows and outflows in the following months look like those for April?
DECISION: Assuming that your cash forecast is correct, you should invest $28,790 today. This will cover the $27,790 cash shortfall reflected in the ending cash balance for April while leaving $1,000 in the business. The ending cash balance for April reflects the cumulative cash shortfall over the four-month period because the beginning cash balance for January has been set to zero. You will not have to invest any money after April because the cash inflows exceed the cash outflows in April, and this is not expected to change in the following months.