Helen Bowers, owner of Helen’s Fashion Designs, is planning torequest a line of credit from her bank. She has estimated the following sales forecasts forthe firm for parts of 2018 and 2019: May 2018 $180,000June 180,000July 360,000August 540,000September 720,000October 360,000November 360,000December 90,000January 2019 180,000 Estimates regarding payments obtained from the credit department are as follows: collectedwithin the month of sale, 10%; collected the month following the sale, 75%; collectedthe second month following the sale, 15%. Payments for labor and raw materials are madethe month after these services were provided. Here are the estimated costs of labor plusraw materials: May 2018 $90,000June 90,000July 126,000August 882,000September 306,000October 234,000November 162,000December 90,000 General and administrative salaries are approximately $27,000 a month. Lease paymentsunder long-term leases are $9,000 a month. Depreciation charges are $36,000 a month.Miscellaneous expenses are $2,700 a month. Income tax payments of $63,000 are duein September and December. A progress payment of $180,000 on a new design studiomust be paid in October. Cash on hand on July 1 will be $132,000, and a minimum cashbalance of $90,000 should be maintained throughout the cash budget period.a. Prepare a monthly cash budget for the last 6 months of 2018.b. Prepare monthly estimates of the required financing or excess funds—that is, theamount of money Bowers will need to borrow or will have available to invest.c. Now suppose receipts from sales come in uniformly during the month (that is, cashreceipts come in at the rate of 1/30 each day), but all outflows must be paid on the 5th.Will this affect the cash budget? That is, will the cash budget you prepared be validunder these assumptions? If not, what could be done to make a valid estimate of thepeak financing requirements? No calculations are required, although if you prefer, youcan use calculations to illustrate the effects.d. Bowers’ sales are seasonal, and her company produces on a seasonal basis, just aheadof sales. Without making any calculations, discuss how the company’s current anddebt ratios would vary during the year if all financial requirements were met withshort-term bank loans. Could changes in these ratios affect the firm’s ability to obtainbank credit? Explain.
Master Budget
A master budget can be defined as an estimation of the revenue earned or expenses incurred over a specified period of time in the future and it is generally prepared on a periodic basis which can be either monthly, quarterly, half-yearly, or annually. It helps a business, an organization, or even an individual to manage the money effectively. A budget also helps in monitoring the performance of the people in the organization and helps in better decision-making.
Sales Budget and Selling
A budget is a financial plan designed by an undertaking for a definite period in future which acts as a major contributor towards enhancing the financial success of the business undertaking. The budget generally takes into account both current and future income and expenses.
Helen Bowers, owner of Helen’s Fashion Designs, is planning to
request a line of credit from her bank. She has estimated the following sales
the firm for parts of 2018 and 2019:
May 2018 $180,000
June 180,000
July 360,000
August 540,000
September 720,000
October 360,000
November 360,000
December 90,000
January 2019 180,000
Estimates regarding payments obtained from the credit department are as follows: collected
within the month of sale, 10%; collected the month following the sale, 75%; collected
the second month following the sale, 15%. Payments for labor and raw materials are made
the month after these services were provided. Here are the estimated costs of labor plus
raw materials:
May 2018 $90,000
June 90,000
July 126,000
August 882,000
September 306,000
October 234,000
November 162,000
December 90,000
General and administrative salaries are approximately $27,000 a month. Lease payments
under long-term leases are $9,000 a month.
Miscellaneous expenses are $2,700 a month. Income tax payments of $63,000 are due
in September and December. A progress payment of $180,000 on a new design studio
must be paid in October. Cash on hand on July 1 will be $132,000, and a minimum cash
balance of $90,000 should be maintained throughout the
a. Prepare a monthly cash budget for the last 6 months of 2018.
b. Prepare monthly estimates of the required financing or excess funds—that is, the
amount of money Bowers will need to borrow or will have available to invest.
c. Now suppose receipts from sales come in uniformly during the month (that is, cash
receipts come in at the rate of 1/30 each day), but all outflows must be paid on the 5th.
Will this affect the cash budget? That is, will the cash budget you prepared be valid
under these assumptions? If not, what could be done to make a valid estimate of the
peak financing requirements? No calculations are required, although if you prefer, you
can use calculations to illustrate the effects.
d. Bowers’ sales are seasonal, and her company produces on a seasonal basis, just ahead
of sales. Without making any calculations, discuss how the company’s current and
debt ratios would vary during the year if all financial requirements were met with
short-term bank loans. Could changes in these ratios affect the firm’s ability to obtain
bank credit? Explain.
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d. Bowers’ sales are seasonal, and her company produces on a seasonal basis, just ahead
of sales. Without making any calculations, discuss how the company’s current and
debt ratios would vary during the year if all financial requirements were met with
short-term bank loans. Could changes in these ratios affect the firm’s ability to obtain
bank credit? Explain.
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