The preparation of a cash budget is quite vital for a business. Irrespective of the size and the nature of the business, it is important for a company to prepare a periodic cash budget because it has a number of benefits. The budget helps an entity to ascertain the amount of cash collected and the payment made during a given period. It also enables a company to determine whether there is adequate cash in the business or there is need to borrow money. The paper seeks to prepare a cash budget for Chester & Wayne Company and the supporting schedules. The company deals with food distribution.
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Discussion of the cash flow statement
The cash budget for the business is presented in the appendix below. From the calculations, the cash collections for the month of October amounted to $761,926. The value rose to $989,455 in the month of November and later dropped to $817,477 in the month of December. The total collection for the quarter amounted to $2,568,858. The total payments also rose from $784,026 in the month of October to $989,455 in November. The value dropped to $817,477 in December. The total payments amounted to $2,590,958. It can be noted the amount of collections and payments were the same in the months of November and December. This can be attributed to the fact that the company had a policy of maintaining the cash balance of $120,000 at the end of every month. Thus, any excess cash is invested in marketable securities. In the case of cash deficit, the company sells the securities. If the amount of cash generated from the sale of securities is not adequate, then the company borrows money. This ensured that there was no cash surplus or deficit in those months. In the month of October, the payments exceeded collections. This created a deficit amounting to $22,100.
Evaluation of assumptions
In the calculations, an assumption was made that the gross profit margin is 30%. A decline in the value of gross profit margin to 27.5% as a result of increase in the purchase price is likely to cause an increase in the total expenses at the end of the month. This causes the cash payments to go up. The amount of borrowing also increases.
An increase in the stock balance aimed at minimizing the occurrence of stock out will create a high balance of ending inventory. In order to achieve a high balance of inventory, the company needs to increase the quantity purchased. This will make the total payment go up, especially in the first month when the policy is implemented. In the subsequent years, there may be no need to increase the quantity purchased. Further, an increase in stock is likely to cause an increase in stock handling and storage costs. This policy may cause an increase in the amount of borrowing (Hansen, Mowen & Guan, 2009).
The proposal of Mr. Wayne to eliminate the 2% cash discount will lower the amount cash collected. The amount collected drops from $2,303,055 to 2,299,725, an equivalent of $3,780. Thus, the proposal by Mr. Wayne results in a decline of the total collection (Collier, 2009). On the other hand, Mr. Chester proposed a discount of 3%, an increase of 1% from the initial value. The amount of cash collected from the credit sales under this proposal is $2,296,905. This value is equivalent to 0.27% from the original value of $2,303,055. Thus, the two proposals will cause in a decline in the amount of cash collected and they will create the need to increase borrowing. Further, the proposal made by Mr. Wayne leads to a higher amount of reduction in cash balance than that of Mr. Chester. In summary, cash budgets assist the management of an organization to analyze how various factors can affect the operation of the business.
Collier, P. (2009). Accounting for managers, USA: John Wiley & Sons Ltd.
Hansen, R., Mowen, M., & Guan, L. (2009). Cost management: accounting & control. USA: South Western Cengage Learning.
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Chester & Wayne
|40% after 2% discount||308,700||324,106||340,334||973,140|
|25% without discount||196,875||206,700||217,050||620,625|
|30% next month||225,000||236,250||206,700||667,950|
|Renting of warehouse||24,000||24,000|
|Sale of marketable securities||7,351||192,649||200,000|
|60% of purchases and other||429,871||452,875||470,561||1,353,307|
|40% of purchases and other||354,155||286,580||301,916||942,651|
|Surplus/deficit (Collections – deficit)||-22,100||0||0||-22,100|
|Sales that attract discount||300,000||315,000||330,720||347,280||364,640|
|Collection less discount||294,000||308,700||324,106||340,334||357,347|
|Collection without discount||187,500||196,875||206,700||217,050||227,900|
|Collection 2 months after billing||225,000||236,250||248,040||260,460|
|Purchases and other expenses|
|Cost of sales||578,760||607,740||638,120||651,000|
|Add ending inventory||151,935||159,530||162,750|
|Less beginning inventory||-150,388||-151,935||-159,530|
|Selling and administrative expenses||41,340||43,410||45,580|