The president of the retailer Prime Products has just approached the company’s bank with a request for a $30,000, 90-day loan. The purpose of the loan is to assist the company in acquiring inventories. Because the company has had some difficulty in paying off its loans in the past, the loan officer has asked for a cash budget to help determine whether the loan should be made. The following data are available for the months April through June, during which the loan will be used:
a. On April 1, the start of the loan period, the cash balance will be $24,000. Accounts receivable on April 1 will total $140,000, of which $120,000 will be collected during April and $16,000 will be collected during May. The remainder will be uncollectible.
b. Past experience shows that 30% of a month’s sales are collected in the month of sale, 60% in the month following sale, and 8% in the second month following sale. The other 2% is bad debts that are never collected. Budgeted sales and expenses for the three-month period follow:
April May June
Sales (all on account) $300,000 $400,000 $250,000
Merchandise purchases $210,000 $160,000 $130,000
Payroll $20,000 $20,000 $18,000
Lease payments $22,000 $22,000 $22,000
Advertising $60,000 $60,000 $50,000
Equipment purchases – – $65,000
Depreciation $15,000 $15,000 $15,000
c. Merchandise purchases are paid in full during the month following purchase. Accounts payable to merchandise purchases during March, which will be paid in April, total $140,000.
d. In preparing the cash budget, assume that the $30,000 loan will be made in April and repaid in June. Interest on the loan will total$1200.
Cash management is crucial for any business, and it becomes even more critical when a company seeks external financing, as in the case of Prime Products, a retailer in need of a $30,000, 90-day loan to support inventory acquisition. To evaluate whether this loan should be granted, the company’s bank has requested a cash budget. In this essay, we will analyze the cash budget provided for the months of April through June and determine whether Prime Products can manage its cash flow effectively to repay the loan.
a. Starting with April 1, Prime Products has a cash balance of $24,000. Accounts receivable on April 1 amount to $140,000, with $120,000 expected to be collected in April and $16,000 in May. The remainder is deemed uncollectible. These collections reflect a conservative approach to cash inflow projections, taking into account potential delinquencies.
b. Past sales data reveal that 30% of sales are collected in the same month, 60% in the following month, and 8% in the second month following the sale. A 2% provision is made for bad debts. These percentages are applied to budgeted sales for April, May, and June, which are $300,000, $400,000, and $250,000, respectively.
Budgeted expenses for the three-month period are as follows:
Merchandise purchases: $210,000 in April, $160,000 in May, and $130,000 in June.
Payroll: $20,000 each month.
Lease payments: $22,000 each month.
Advertising: $60,000 in April, $60,000 in May, and $50,000 in June.
Equipment purchases: $65,000 in June.
Depreciation: $15,000 each month.
Merchandise purchases are paid in full during the month following the purchase. Accounts payable to merchandise purchases in March, payable in April, total $140,000.
Now, let’s analyze the cash budget provided and determine whether Prime Products can meet its cash needs during the loan period:
Starting with an opening cash balance of $24,000 in April, the company anticipates cash receipts from sales and accounts receivable collections. Considering the collection percentages, we estimate cash inflows as follows:
April: $24,000 (opening balance) + $90,000 (30% of April sales) + $120,000 (collections) = $234,000
Prime Products also has to meet its cash outflows during this period:
Merchandise purchases in April ($210,000) and payments to accounts payable ($140,000) result in a total cash outflow of $350,000.
Payroll ($20,000), lease payments ($22,000), and advertising expenses ($60,000) amount to $102,000 in April.
The loan interest of $1,200 must be accounted for.
The resulting cash balance for April is ($234,000 – $350,000 – $102,000 – $1,200) = -$219,200.
May and June will see similar calculations for cash inflows and outflows, including repayment of the loan principal.
Based on the provided cash budget and analysis, it appears that Prime Products may face a significant cash shortfall in April, even after considering the $30,000 loan. The cash deficit in April must be addressed, either through additional financing or by adjusting expenses and purchases. While May and June may have healthier cash positions due to the loan, Prime Products must ensure it has a plan in place to meet its financial obligations promptly and efficiently throughout the loan period.
In conclusion, this analysis underscores the importance of effective cash flow management for businesses seeking external financing and highlights the need for a well-structured repayment plan to ensure financial stability and success.
As a renowned provider of the best writing services, we have selected unique features which we offer to our customers as their guarantees that will make your user experience stress-free.
Unlike other companies, our money-back guarantee ensures the safety of our customers' money. For whatever reason, the customer may request a refund; our support team assesses the ground on which the refund is requested and processes it instantly. However, our customers are lucky as they have the least chances to experience this as we are always prepared to serve you with the best.
Plagiarism is the worst academic offense that is highly punishable by all educational institutions. It's for this reason that Peachy Tutors does not condone any plagiarism. We use advanced plagiarism detection software that ensures there are no chances of similarity on your papers.
Sometimes your professor may be a little bit stubborn and needs some changes made on your paper, or you might need some customization done. All at your service, we will work on your revision till you are satisfied with the quality of work. All for Free!
We take our client's confidentiality as our highest priority; thus, we never share our client's information with third parties. Our company uses the standard encryption technology to store data and only uses trusted payment gateways.
Anytime you order your paper with us, be assured of the paper quality. Our tutors are highly skilled in researching and writing quality content that is relevant to the paper instructions and presented professionally. This makes us the best in the industry as our tutors can handle any type of paper despite its complexity.
Recent Comments