Purpose of report
The purpose of this report is, according to Dadley Corporation estimated sales budget to prepare a cash budget by month and in total for the second quarter. It will show how cash flows in and out of business. Then, to discuss importance of cash budgeting for a rapidly expanding company such as Dadley Corporation.
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Preparation of Cash budget
To develop a cash budget, firstly we need to know the forecasted budgeted sales for the coming year. Estimated figures are shown in table1. Months colored in red, represent the second quarter of the year. The cash budget will be based on April, May and June.
Table1.
Secondly, the information provided by operating manager must be analyzed.
- Debts received. 60% of billings are collected in the month after the sale and 40% in the second month after the sale. The table below shows all the necessary calculations to find debts received for April, May and June.
Table2.
- Cost of raw materials. Cost of it equals to 50% of sales.60% of the raw materials are received one month prior to sale and 40%during the month of sale. Calculations are shown below.
Table3.
- Payments to creditors. The costs of raw materials calculated above were used to prepare the table of payments. It is known that 80% of creditors are paid by Dadley one month after receipt of the purchased materials and other 20% are paid the second month after receipt.
Table4.
- Hourly wages. It depends on sales volume and is estimated to be 20% of the current month’s sales. Wages are paid in the month incurred.
Table5.
- General& Administrative expenses. Total expenses are estimated to be 2 640 000 for the year. All of these expenses are incurred evenly through the year except property taxes which are paid in four equal installments in the last month of each quarter. Table6. Represents how these costs are spread over the second quarter.
Table6
- Corporation tax. The tax rate is 40%. Payments are made in the first month of each quarter based on the profit for the prior quarter. Estimated Dadleys net profit for the first quarter is 612 000. Then, corporation tax payment for the second
Quarter that must be paid in April equals to 244800 (612 000x40%).
- Equipment& Warehouse facilities. Purchases of it are budgeted at 28 000 for April and 324 000 for May.
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Interest on borrowed funds. As Dadley has a policy of maintaining an end – of – month cash balance of 100 000, it borrows or invests monthly, as needed to maintain this balance. Interest expense on borrowed funds for second quarter is budgeted to be 8 000 and to be paid in June.
After considering and calculating the entire points cash budget can be prepared successfully. In the next step of report a cash budget is going to be presented. Cash budget for Dadley Corporation prepared by month and in total for the second quarter.
Dadley cash budget for the second quarter
Importance of budgeting
In the last part of the report, importance of cash budgeting is discussed.
To begin with, every business needs a careful handling of its expenditures. Cash budget is a commonly used technique for planning expected cash intake and spending. It is a management plan for the most important factor of a company’s viability— its cash position.
The cash budget starts with the beginning cash balance to which is added the cash inflows to get cash available. Cash outflows for the period are then subtracted to calculate the cash balance before investing or borrowing to maintain a final closing balance.
The main aim of cash budget is to show cash flows in and out of the company. It, then helps planning short – term credit needs, determines expenses and ability to pay debts. A forward – looking perspective enables management to be in a better position to exploit opportunities, indicate potential problems that could arise in the future and allows taking appropriate actions.
By most financial institutions every business is required to prepare cash budget before making expenditures on new assets or expenditures associated with expansion. Banks and other creditors are more likely to grant loans if the loan request is supported by the cash plan. Otherwise, there is no certainty that company will be able to repay the loan. In any firm, but especially a rapidly expanding firm, there are timing differences between outflows and inflows of cash. If receipts and disbursements are not monitored, the firm could find itself with a growing short-term debt to meet payments and the minimum cash balance.
Conclusion
In this report, Dadley corporation financial data was analyzed to prepare a cash budget for the second quarter of the year. The budget also summarizes the total of April, May and June. It will help managers to plan the expenditures of the company, to fit in estimated cash resources. The report also discussed the main aims of cash budget. And the main aim of it is to estimate business cash inflows and outflows.
