1. Kashiram & Co. is a manufacturer of children‘s garments. The sales vary seasonally, and are highest in the month of May. The management of the company wishes to prepare a cash budget from the period January through June. The financial manager starts with the balance sheet of 1 January as shown in Table 30.5 and prepares a cash budget. Table 30.6 gives the sales for seven months.
To prepare the cash budget, the following additional information is given: Table 30.5: Kashiram & Co's
Balance Sheet, 1 January
Amount Assets Amount
Liabilities & Capital (Rs ’000) (Rs ’000) Current liabilities 3,000 Cash 84,480 Other liabilities 10,800 Debtors 42,000 Share capital 317,280 Inventory 123,000 Fixed assets 81,600 Total funds 331,080 Total assets 331,080 Table 30.6: Sales Estimates
(Rs ’000) (Rs ’000)
December 60,000 April 228,000
January 84,000 May 288,000
February 156,000 June 108,000
Prepared by A.K.Mohideen, MBA, M.Phil, (Ph.D)
34 (a) Sales for the month of December were Rs 60,000,000.
(b) Credit sales are 70 per cent and cash sales 30 per cent of the total sales. (c) Sales are collected after one month.
(d) Gross profit margin on sales is expected to be 25 per cent. (i) Payments for the purchases are made one month in advance.
(f) A minimum inventory of Rs 60,000,000 at cost is always maintained. The company purchases sufficient inventory each month to take care of sales of the subsequent month.
(g) Other monthly expenses are:
(Rs ’000) Salary 9,600 Rent 2,400 Depreciation 720 Other 1% of sales (h) A 16 per cent interest on borrowed funds is payable in the next month of every quarter on the
outstanding balance. Borrowing is possible each month in the multiples of Rs 1,000,000.
2. Kay Co. always prepares a cash budget for the months of January, February and March. Estimated sales for these months are Rs 500,000, Rs 600,000 and Rs 750,000 respectively. Actual sales for the month of December were Rs 520,000. About 80 per cent of Kay Co.‘s total sales are on cash basis and 20 per cent credit sales collectible after one month. Kay Co. pays its creditors, which are usually about 40 per cent of sales, one month after the sale month.
The forecasts of salary expenses for the coming three months are expected to be Rs 280,000 per month. Kay Co. is expected to spend about Rs 80,000 in February and Rs 190,000 in March on capital expenditures. A previously declared dividend of Rs 75,000 is to be paid in January and miscellaneous expenses are estimated to be Rs 15,000 per month. The company also has Rs 36,000 bills payable in February.
(a) Prepare a statement showing the sale receipts.
(b) Assuming that the 1 January cash balance is Rs 500,000 and that the minimum cash balance requirement of the company is Rs 500,000, prepare a cash budget for the next three months. (c) Explain the reason for estimated cash shortage that appears imminent.
(d) Suppose that Kay Co. lends any surplus at 15 per cent per year for one month and borrows for three months at 18 per cent year when there is a cash shortage. Make the necessary changes in your cash budget prepared in (b) to make it balance. Assume that interest is paid at the end of any borrowing or lending period.
3. Prepare a cash budget for the Kamp Manufacturing Company for three months of May, June and July. The company has a policy of maintaining a minimum cash balance of Rs 30,000. The company‘s cash balance as on 30 April is Rs 30,000.
Actual Sales (Rs) Estimated Sales (Rs)
January 75,500 May 105,000
February 75,000 June 120,000
March 90,000 July 150,000
April 90,000 August 150,000
Consider the following additional information:
(a) Cash sales are 60 per cent of the total sales. The remaining sales are collected equally during the following two months.
(b) Cost of goods manufactured is 75 per cent of sales. 80 per cent of this cost is paid after one month and the balance is paid after two months of the cost incurrence.
(c) Fixed operating expenses are Rs 15,000 per month. Variable operating expenses are 10 per cent of sales each month.
(d) Half yearly interest on 12% Rs 450,000 debentures is paid during July. (e) Rs 60,000 are expected to be invested in fixed assets during June. (f) An advance tax of Rs 15,000 will be paid in July.
You are also required to determine whether or not borrowing will be necessary during the period and if yes, when and for how much.
Prepared by A.K.Mohideen, MBA, M.Phil, (Ph.D)
35 4. X Co. has average credit sales of Rs 1,500,000 per year. The working days per year are 300. If the company could reduce its bill processing time by two days, what would be the annual savings, assuming an interest rate of 18 per cent?
5. The Sirsa Company is a large wholesale distributor of consumer goods that sells mostly on credit. Collections from a particular location average Rs 200,000 per day. The total float averages 6 days for customers in this location. The opportunity cost of funds is 15 per cent.
(a) The company has an offer from a bank to set up a lock-box system that will reduce float by 4 days, but the company will have to maintain a minimum balance of Rs 400,000 with the bank. Should the offer be accepted?
(b) The bank also offers an option of a fixed fee of Rs 20,000 per year. What should the company do? 6. A company has a central billing system. Its daily collections on an average are Rs 500,000. The total
time for administering the collection is 6 days.
(a) If a firm‘s required rate of return is 10 per cent, what is the cost of the system to the firm?
(b) If the management designs a lock-box system that reduces lag by 3 days, what is the reduction in cash balances?
7. Garima Detergents has discovered that it takes about 10 days to collect the funds for use in the company once the cheques are received from the customers. The company‘s annual turnover is Rs 9.70 crore. How much funds is to be freed if the company could reduce the collection time from 10 days to 8 days? If the freed funds could be used to reduce bank borrowings which costs 18 per cent per annum, what would be the net savings to the company? Assume a 360-day year and 35 per cent corporate tax rate.
8. A company located in Ahmedabad wants to transfer Rs 15 lakh to its branch in Chennai. It will cost the company Rs 10 to mail the draft by a registered post. It will take 10 days for money to be finally transferred in Chennai. During these 10 days, the company is losing an opportunity of earning 12 per cent p.a. Alternatively, the company can instantaneously transfer the money telegraphically that will cost the company Rs 1,000. What should the company do?