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:

Question

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
	[latex]\underline{Jan.}[/latex]	[latex]\underline{Feb.}[/latex]	[latex]\underline{Mar.}[/latex]	[latex]\underline{ِApr.}[/latex]	[latex]\underline{Total}[/latex]
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	[latex]\underline{– \quad \quad \quad}[/latex]	[latex]\underline{– \quad \quad \quad}[/latex]	[latex]\underline{– \quad \quad \quad}[/latex]	[latex]\underline{– \quad \quad \quad}[/latex]	[latex]\underline{– \quad \quad \quad}[/latex]
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	[latex]\underline{1,000}[/latex]	[latex]\underline{1,000}[/latex]	[latex]\underline{1,000}[/latex]	[latex]\underline{1,000}[/latex]	[latex]\underline{4,000}[/latex]
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	[latex]\underline{– \quad \quad \quad}[/latex]	[latex]\underline{– \quad \quad \quad}[/latex]	[latex]\underline{– \quad \quad \quad}[/latex]	[latex]\underline{– \quad \quad \quad}[/latex]	[latex]\underline{– \quad \quad \quad}[/latex]
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?

Accepted Answer

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.

Question 18.1: Using a Cash Budget SITUATION: It is January 1, and you have...

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