Solution to Case 23

Cash Budgeting

Getting Our Act Together*

*Note to instructors: Please note that taxes are $560,000 for the year (paid in Mar, Jun, Sep. and
Dec.) Other expenses are $6,000 PER MONTH for the coming year
1.

Even though sales have been increasing, why is Best Electronics in such a cash flow
crunch?
Best Electronics cash inflows and outflows are not well balanced. Its sales are seasonal as well,
with the highest sales occurring in the last quarter of the year. The firms payments for
purchases are made in 30 days while the receipts (especially from wholesale orders) take
between 30-60 days to come in, on average. The firm does not have a minimum cash balance
policy and therefore in lean cash flow months its cash balance declines considerably.

2.

What does the firm need to do as soon as possible?

The firm needs to prepare a detailed cash budget showing the monthly cash collections and
disbursements and the resulting surpluses and shortfalls. This will help it to determine how
much of a line of credit it needs to set up so as to avoid having to be faced with overdraft
notices from its bank.

3.

Prepare the collections worksheet. Which month has the greatest amount of cash inflows?

Collections Worksheet
NOV

DEC

JAN

FEB

MAR

APR

850,000 875,000 350,000 300,000 250,000 400,000

Sales

MAY
500,000

JUN

JUL

AUG

525,000 600,000 625,000

SEP

OCT

NOV

DEC

JAN

700,000 725,000 800,000 900,000 400,000

Collections
340000 350000 140000 120000 100000

Cash

249900 257250 102900

30-days

200000

210000 240000

250000

280000 290000 320000 360000 160000

88200

73500

117600

147000 154350

176400

183750 205800 213150 235200 264600

249900 257250 102900

88200

73500

117600 147000

154350

176400 183750 205800 213150 235200

340000 599900 647150 480150 291100

321700

391100

474600 541350

580750

640150 679550 738950 808350 659800

60-days
Total Inflows

160000

The greatest amount of cash inflows occurs in December ($808,350).

4.

Prepare the disbursements worksheet. Which months seem to be hit by the highest amount of cash outflows? Why?
Can this trend be changed?
Disbursements Worksheet
NOV

DEC

JAN

FEB

MAR

APR

MAY

JUN

JUL

AUG

SEP

OCT

NOV

DEC

280000

240000

200000

320000

400000

420000

480000

500000

560000

580000

640000

720000

320000

Payments

700000

280000

240000

200000

320000

400000

420000

480000

500000

560000

580000

640000

720000

Salaries

50,000

50,000

50,000

50,000

50,000

50,000

50,000

50,000

50,000

50,000

50,000

50,000

50,000

Interest

3,000

3,000

3,000

3,000

3,000

3,000

3,000

3,000

3,000

3,000

3,000

3,000

3,000

Other expenses

6,000

6,000

6,000

6,000

6,000

6,000

6,000

6,000

6,000

6,000

6,000

6,000

Purchases

700000

140,000

Taxes

140,000

6,000
140,000

30,000

New Computer
Total Payments

140,000

759000

339000

299000

399000

379000

459000

649000

539000

559000

759000

639000

699000

919000

June, September, October, November, and December are hit by relatively high cash outflows. This is because of higher
payments for purchases resulting from higher forecasted sales during the last quarter of the year. Changing the
ordering and payment schedules during the year can change this trend.
2

5.

How should the depreciation expense be treated in the cash budget? Depreciation is not a cash outflow and should be
ignored in the cash budget.

6.

Which months seem to be particularly vulnerable to cash deficits? Which months have the greatest surpluses? March,
April, May, June, September, and December seem to be particularly vulnerable to cash deficits. January and February have the
greatest surpluses.

7.

If the cash balance outstanding is -$2,000, help Joe develop a cash budget for Best Electronics for the next twelve
months. How can Mark use the cash budget to minimize cash shortages and plan for the future?

12 MONTH CASH BUDGET

JAN

FEB

MAR

APR

MAY

JUN

JUL

AUG

SEP

OCT

NOV

Total Inflows

$ 647,150

$ 480,150

$ 291,100

$ 321,700

$ 391,100

$ 474,600

$ 541,350

$ 580,750

$ 640,150

$ 679,550

$ 738,950

$ 808,350

Total Payments

$ 339,000

$ 299,000

$ 399,000

$ 379,000

$ 459,000

$ 649,000

$ 539,000

$ 559,000

$ 759,000

$ 639,000

$ 699,000

$ 919,000

Beginning Cash Balance

$ (2,000)

$ 306,150

$ 487,300

$ 379,400

$ 322,100

$ 254,200

$ 79,800

$ 82,150

$ 103,900

$ (14,950)

$ 25,600

$ 65,550

Net Cash Flow

$ 308,150

$ 181,150

$ (107,900)

$ (57,300)

$ (67,900)

$ (174,400)

2,350

$ 21,750

$ (118,850)

$ 40,550

$ 39,950

$ (110,650)

Ending Cash Balance

$ 306,150

$ 487,300

$ 379,400

$ 322,100

$ 254,200

$ 79,800

$ 82,150

$ 103,900

$ (14,950)

$ 25,600

$ 65,550

$ (45,100)

The budget shows that September and December are going to particularly vulnerable months for the firm as far as cash
shortages are concerned. The maximum shortfall seems to be around $45,000. Mark can use the cash budget to determine how
much of the surplus cash should be invested and how much should be kept as a minimum reserve to prevent shortfalls.

DEC

8.

Given that the monthly sales figures have been fluctuating so much what should Joe
do while preparing the cash budget? Can he take the sales figures provided by the
finance department at face value? If so why? If not why? What other options does
he have?
Joe should prepare various versions of the cash budget using alternative sales scenarios.
For example, Best, Base, and Worst case scenarios can be analyzed by varying the sales
figures. The finance departments sales figures should not be taken at face value. They
are probably too conservative. As stated earlier, alternative scenario analyses should be
performed.

9.

How can a minimum cash balance be built in? How much of a minimum cash balance
seems warranted? What can the company do with the excess cash that is generated in
some months? By taking a look at the forecasted cash flows and providing enough of a
reserve to cover the largest forecasted shortfall one can build in a minimum cash balance.
The largest shortfall seems to be $45,100 (in December). So a minimum cash balance of
about $50,000 seems to be warranted. If this cash balance is allocated at the start of the
budget, it will help minimize the risk of future cash shortfalls. Excess cash can be
invested in money market securities.

10.

Rework the budget by using your suggested minimum cash balance and assume
that short-term loans carry an interest rate of 8% per year.
Click here for spreadsheet calculations.

JAN

FEB

MAR

APR

MAY

JUN

JUL

AUG

SEP

OCT

NOV

DEC

Total Inflows

$ 647,150

$ 480,150

$ 291,100

$ 321,700

$ 391,100

$ 474,600

$ 541,350

$ 580,750

$ 640,150

$ 679,550

$ 738,950

$ 808,350

Total Payments

$ 339,000

$ 299,000

$ 399,000

$ 379,000

$ 459,000

$ 649,000

$ 539,000

$ 559,000

$ 759,000

$ 639,000

$ 699,000

$ 919,000

Beginning Cash Balance

$ (2,000)

$ 306,150

$ 487,300

$ 379,400

$ 322,100

$ 254,200

$ 79,800

$ 82,150

$ 103,900

$ 50,000

$ 50,000

$ 89,950

Net Cash Flow

$ 308,150

$ 181,150

$ (107,900)

$ (57,300)

$ (174,400)

$ 21,750

$ (118,850)

$ 40,550

$ 39,950

$ (110,650)

Borrowing

(67,900)
-

2,350
-

$ 64,950

Interest on short-term borrowing

Short-term borrowing repaid
Ending Cash Balance
Minimum Cash Balance
Cumulative Surplus or deficit

$ 306,150
-50,000
$ 256,150

$ 487,300
-50,000
$ 437,300

$ 379,400
-50,000
$ 329,400

$ 322,100
-50,000
$ 272,100

$ 254,200
-50,000
$ 204,200

$ 79,800
-50,000
$ 29,800

$ 82,150
-50,000
$ 32,150

$ 103,900

$ 50,000

-50,000
$ 53,900

$ 70,700

(166)

$ (40,117)

$ (24,833)

$ 50,000

$ 89,950

-50,000
$

(433)

-50,000
$

$ 50,000

-50,000

-50,000

$ 39,950

Cumulative Surplus or deficit

Beginning Short term borrowing
Change in short term debt

$ 64,950

$ 64,950

$ 24,833

$ (40,117)

$ (24,833)

$ 24,833

$ 64,950

Ending Short-term debt