Treasury Management

Activity No. 2 – Cash Budget

Problem:

Terrel Manufacturing expects stable sales through the summer months of June, July, and August of $500,000 pe
month. The firm will make purchases of $350,000 per month during these months. Wages and salaries are
estimated at $60,000 per month plus 7 percent of sales. The firm must make a principal and interest payment o
an outstanding loan in June of $100,000. The firm plans a purchase of a fixed asset costing $75,000 in July. The
second quarter tax payment of $20,000 is also due in June. All sales are for cash.

Requirement
A. Construct a cash budget for June, July, and August, assuming the firm has a beginning cash balance of
$100,000 in June

B. The sales projections may not be accurate due to the lack of experience by a newly-hired sales manage
If the sales manager believes the most optimistic and pessimistic estimates of sales are $600,000 and
$400,000, respectively, what are the monthly net cash flows and required financing or excess cash
balances?

C. How much is the expected financing requirement if the most pessmistic sales figues materializes over
the three months period

D How much is the expected investing arrangement if the most optimistic sales figures materializes over
the three months period
uly, and August of $500,000 per
s. Wages and salaries are
incipal and interest payment on
et costing $75,000 in July. The

as a beginning cash balance of

by a newly-hired sales manager.

tes of sales are $600,000 and
ed financing or excess cash

sales figues materializes over

sales figures materializes over

Solution
June
Pessimistic Most Likely Optimistic
Sales ( Cash) $400,000 $500,000 $600,000
Less: Cash Disbursements
Purchases 350,000 350,000 350,000
Wages and Salaries 60,000 60,000 60,000
Variable portion ( Wages and Salaries) 28,000 35,000 42,000
Principal and Interest 100,000 100,000 100,000
Purchase of Fixed Assets
Tax Payments 20,000 20,000 20,000
Total Cash Disbursements $558,000 $565,000 $572,000
Net cash flow -158,000 -65,000 28,000
Add: Beginning Cash Balance 100,000 100,000 100,000
Ending Cash Balance - 58,000 35,000 128,000
Less: Min Cash
Required Financing 58,000
Excess Cash 35,000 128,000
Solution
July
Pessimistic Most Likely Optimistic
Sales ( Cash) $400,000 $500,000 $600,000
Less: Cash Disbursements
Purchases 350,000 350,000 350,000
Wages and Salaries 60,000 60,000 60,000
Variable portion ( Wages and Salaries) 28,000 35,000 42,000
Principal and Interest
Purchase of Fixed Assets 75,000 75,000 75,000
Tax Payments
Total Cash Disbursements $513,000 $520,000 $527,000
Net cash flow -113,000 -20,000 73,000
Add: Beginning Cash Balance - 58,000 35,000 128,000
Ending Cash Balance - 171,000 15,000 201,000
Less: Min Cash
Required Financing
Excess Cash
- 171,000 15,000 201,000
Solution
August
Pessimistic Most Likely Optimistic
Sales ( Cash) $400,000 $500,000 $600,000
Less: Cash Disbursements
Purchases 350,000 350,000 350,000
Wages and Salaries 60,000 60,000 60,000
Variable portion ( Wages and Salaries) 28,000 35,000 42,000
Principal and Interest
Purchase of Fixed Assets
Tax Payments
Total Cash Disbursements $438,000 $445,000 $452,000
Net cash flow -38,000 -55,000 148,000
Add: Beginning Cash Balance 171,000 15,000 201,000
Ending Cash Balance
Less: Min Cash
Required Financing 209,000 70,000
Excess Cash 349,000
-209,000 70,000 349,000