Budget in Service Company (Cash Budget)
Edge Soccer Program (Edge) began the year with a cash balance of $10,500. The budget forecasts that collections from customers owed to the company will be $11,000 in January and $15,200 in February. The soccer program is also supposed to receive $8,500 in January on a note receivable from a soccer club that owes Edge for training.
Edge plans to purchase soccer equipment in January and February with cash. The budgeted amounts of the purchases are $15,600 in January and $14,800 in February. Operating costs for the business is $2900 per month.
Edge must maintain a minimum cash balance of $10,000 in their bank account at all times. If the amount in the bank account falls below $10,000, then bank extends credit to Edge immediately in multiples of $1000. Edge pays back any amounts borrowed each quarter in payments of $2000 plus 4% interest. The first payment occurs three (3) months after the bank has extended edge credit.
Requirement
Prepare a cash budget for January and February.
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Cash budget for Edge Soccer Program (Edge) for January and February
To prepare a cash budget for Edge Soccer Program (Edge) for January and February, we will outline the cash inflows and outflows for each month based on the provided information. The cash budget will help us determine how much cash Edge will have at the end of each month and whether it needs to borrow any funds to maintain its minimum cash balance.
Cash Budget for Edge Soccer Program
January
Description Amount ($)
Starting Cash Balance 10,500
Cash Inflows:
Collections from Customers 11,000
Note Receivable from Soccer Club 8,500
Total Cash Inflows 19,500
Cash Outflows:
Equipment Purchases 15,600
Operating Costs 2,900
Total Cash Outflows 18,500
Net Cash Flow for January 19,500 - 18,500 = 1,000
Ending Cash Balance 10,500 + 1,000 = 11,500
February
Description Amount ($)
Starting Cash Balance 11,500
Cash Inflows:
Collections from Customers 15,200
Total Cash Inflows 15,200
Cash Outflows:
Equipment Purchases 14,800
Operating Costs 2,900
Total Cash Outflows 17,700
Net Cash Flow for February 15,200 - 17,700 = -2,500
Ending Cash Balance Before Borrowing 11,500 - 2,500 = 9,000
Borrowing Analysis for February
Since the ending cash balance before borrowing in February is $9,000, which is below the minimum required cash balance of $10,000, Edge will need to borrow funds.
- Minimum Required Cash Balance: $10,000
- Ending Cash Balance Before Borrowing: $9,000
- Amount Needed to Borrow: $10,000 - $9,000 = $1,000
Since the bank extends credit in multiples of $1,000, Edge will borrow $1,000.
Final Cash Budget Summary
February (Adjusted with Borrowing)
Description Amount ($)
Starting Cash Balance 11,500
Cash Inflows:
Collections from Customers 15,200
Borrowing Amount 1,000
Total Cash Inflows 16,200
Cash Outflows:
Equipment Purchases 14,800
Operating Costs 2,900
Total Cash Outflows 17,700
Net Cash Flow for February 16,200 - 17,700 = -1,500
Ending Cash Balance After Borrowing 9,000 + 1,000 = 10,000
Summary
- Ending Cash Balance for January: $11,500
- Ending Cash Balance for February (after borrowing): $10,000
This cash budget provides a comprehensive view of Edge Soccer Program’s cash position over January and February and highlights the need for borrowing to maintain the required minimum cash balance.
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