Page 287 - DMGT405_FINANCIAL%20MANAGEMENT

Unit 13: Management of Cash

Debtors at the end of the quarter are one-third of sales of the quarter. The opening balance Notes
of debtors is 30,00,000. Cash on hand at the beginning of the year is 650,000 and the
desired maximum balance is 500,000. Borrowings are made at the beginning of the
quarters in which the need will occur in multiples of 10,000 and are repaid at the end of
quarters. Interest charges may be ignored. You are required to prepare:

(a) A cash budget by quarters – for the year and
(b) State the amount of loan outstanding at the end of the year
Solution: Cash budget next year (quarter wise) (000)

Quarter
1 2 3 4 Total
(A) Cash inflows
Collection from debtors
1. From prior quarter 3000 2500 3500 6000 15000
(1/3 of sales)
2. From current quarter 5000 7000 12000 7000 31000
(2/3 of sales)
8000 9500 15500 13000 46000
(B) Cash outflows
1. Production costs 7000 10000 8000 8500 33500
2. Selling, admn. and 1000 2000 2900 1600 7500
other costs
3. Plant and other fixed 100 1100 2100 2100 5400
assets purchased
Total cash payments 8100 13100 13000 12200 46400
(C) Surplus/(deficiency) (100) (3600) 2500 800 (400)
1. Beginning balance 650 550 500 500 650
2. Ending balance 550 (3050) 3000 1300 250
(indicated)
Borrowing required 3550 3550
(deficiency + min. cash reqd.)

Quarter
1 2 3 4 Total
Repayment mode (2500) (800) (3300)
(balance – min. cash reqd.)
Ending balance 550 500 500 500 500

Loan outstanding is 35,50,000 – 33,00,000 = 250,000

Example: A firm uses a continuous billing system that results in an average daily receipt
of 40,00,000. It is contemplating the institution of concentration banking, instead of the current
system of centralized billing and collection. It is estimated that such a system would reduce the
collection period of accounts receivable by 2 days.
Concentration banking would cost 75,000 annually and 8% can be earned by the firm or its
investments. It is also found that a lock-box system can reduce its overall collection time by four
days and could cost annually 120,000.

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