# FI504 Case Study 3

The cash budget was covered during Week 4 when we covered TCO D and you read Chapter 7. There is also a practice case study to work on. Your Professor will provide the solution to the practice case study at the end of Week 5. This case study should be uploaded by 11:59PM Mountain time of the Sunday ending Week 6 to the Week 6 Assignment Dropbox. You are encouraged to use the Excel template file provided in Doc Sharing.
The Oxford Company has budgeted sales revenues as follows:
July                August                   September
Credit sales                                                   \$30,000           \$24,000          \$18,000
Cash sales                                                      18,000            51,000            39,000
Total sales                                                    \$48,000           \$75,000          \$57,000
Past experience indicates that 60% of the credit sales will be collected in the month of sale and the remaining 40% will be collected in the following month.
Purchases of inventory are all on credit and 50% is paid in the month of purchase and 50% in the month following purchase.  Budgeted inventory purchases are \$65,000 in July, \$45,000 in August, and \$21,000 in September.
Other budgeted cash receipts:  (a) sale of plant assets for \$12,350 in August, and (b) sale of new common stock for \$16,850 in September.  Other budgeted cash disbursements:  (a) operating expenses of \$6,750 each month, (b) selling and administrative expenses of \$12,500 each month, (c) dividends of \$19,000 will be paid in August, and (d) purchase of equipment for \$6,000 cash in September.
The company has a cash balance of \$10,000 at the beginning of August and wishes to maintain a minimum cash balance of \$10,000 at the end of each month.  An open line of credit is available at the bank and carries an annual interest rate of 12%.  Assume that all borrowing is done on the first day of the month in which financing is needed and that all repayments are made on the last day of the month in which excess cash is available.  Also assume that there is no outstanding financing as of August 1.
Requirements:
1.  Use this information to prepare a Cash Budget for the months of August and September, using the template provided in Doc Sharing.
2.  What are the three sections of a Cash Budget, and what is included in each section?
3.  Why is a Cash Budget so vital to a company?
4.  What are the five basic principles of cash management that a company can follow in order to improve its chances of having adequate cash?