Victoria Kite Company is a small Melbourne firm that sells kites on the Web wants a master budget for the next three months, beginning January 1, 2005. When developing the master budget it was discovered that only 60% of the current sales are
Master Budget
Group Project
Unit Four
ACG_420
Managerial Accounting
And
Organizational Controls
July 1, 2006
Victoria Kite Company’s
Master Budget
Victoria Kite Company is a small Melbourne firm that sells kites on the Web wants a master budget for the next three months, beginning January 1, 2005. When developing the master budget it was discovered that only 60% of the current sales are collected in the current month, 30% in the next month, and 10% in the month thereafter, although the terms and conditions for repayment of sales is 30 days. An ending minimum cash balance of $5,000 is desired at the end of each month and the budget shows ...
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Victoria Kite Company is a small Melbourne firm that sells kites on the Web wants a master budget for the next three months, beginning January 1, 2005. When developing the master budget it was discovered that only 60% of the current sales are collected in the current month, 30% in the next month, and 10% in the month thereafter, although the terms and conditions for repayment of sales is 30 days. An ending minimum cash balance of $5,000 is desired at the end of each month and the budget shows an ending balance of ($10,400) therefore creating the need for a loan of $15,500 giving Victoria Kite Company a closing cash balance of $5,100 at the end of January 2005. (See table 1) Victoria Kite Company needs to take out a bank loan due to the lack of funds to pay the larger rent and monthly costs. The company only has the minimum starting cash balance causing a shortage when subtracting the disbursements from the cash receipts. Table 1
Other causes for the need of a bank loan could be when a company is going through a renovation stage and is having larger than normal purchases of materials or fixtures or when a business deals with collecting payments from customers. Whether this is a retail establishment or a manufacturing company paid for goods, the payments received from customers usually has a set of terms and conditions. Customers sometimes adhere to these terms and conditions, but usually try to stretch them out as long as they can. This delay in payment can cause a cash crunch on a business. A bank loan can give a business the cushion needed to be sure employees have wages paid on time, provide the money needed for the next order of supplies needed to manufacture more products, or help to pay for other operating expenses while awaiting the cash and credit payments to come in.
Another option to taking out a loan for the Victoria Kite Company is with its initial negotiations with its vendors and suppliers before starting the business. By negotiating flexible terms and conditions with its vendors it might be able to avoid needing a loan at the initial startup. An example of this would be to request net 60 or 90 day terms for the first 3 months and then reverting to the standard net 30 day terms that are common in business today. By doing this on selective accounts you could in essence lower your initial cash out lay until your cash collections catches up to sales at the end of 3 months. One other option would be to offer a cash back discount like 5% for paying within the specified net 30 day terms. This offers an incentive to both the customer and the company.
The Victoria Kite Company comes to a negative excessive cash balance in January requiring them to get a bank loan. The terms of the loan are the loan has to be paid in $500 increments with 10% interest rate. The accounts receivable, cash and credit payments are the income sources that will be used to repay the bank loan. A bank loan also helps a company grow faster than it may be able to grow without the added money. If a business is working at its full capacity and still unable to meet customer demand, it may be worth taking out a bank loan to increase the facility to be able to meet customer demand. Repayment of the bank loan will be paid back in full with interest in the month of February 2005 due to the increase cash collections from sales operation sources providing the cash flow for the repayment of the bank loan.
References:
- Horngren, Sundem, Stratton (2005) Introduction to Management Accounting 13 Edition, Prentice Hill ISBN 0-13-144071-3
- Unit 4 Course Materials Retrieved June 24, 2006