Page 133 - DCOM505_WORKING_CAPITAL_MANAGEMENT

Working Capital Management

Notes
Example: Here is an example of a cash budget simulated for a small business:
Small Business Cash Budget
For the three months ending March 31, 200x

Item Jan. Feb. March
Beginning cash balance 15,000 -13,500 20,000
Expected Cash Receipts:
Cash Sales 20,000 25,000 30,000
Collection of accounts receivable 45,000 55,000 70,000
Other income 0 0 5,000
Total cash collected 80,000 66,500 125,000
Expected cash payments:
Raw materials (or inventory) 50,000 11,000 5,000
Payroll 10,400 10,400 10,400
Other direct expenses 2,000 2,000 2,000
Advertising 10,000 0 0
Selling expenses 6,000 8,000 6,000
Administrative expenses 4,500 4,500 4,500
Plant and equipment expenditures 10,000 10,000 10,000
Other payments 600 600 600
Total cash expenses 93,500 46,500 38,500
Cash surplus (or deficit) -13,500* 20,000* 86,500

* The ending cash balance becomes the beginning cash balance for the next period.

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Case Study Creative Promotion Company

r. Bhatt is a young man of bright ideas. Although he is employed as an engineer
in one of the large engineering concerns in Lahore (Pakistan), he spends all his
Mspare time developing new products in his private laboratory at home. Currently,
he has commercially provided a domestic appliance called Lavex, which would be a great
convenience kitchen to help housewives. He is not interest in manufacturing and selling his
new products; his only interest in developing new products is to make money by way of
selling patent rights to some established concerns. However, he releases that till he succeeds
in selling the patent rights at the price he expects, he has to manufacture and sell the new
products on ad hoc basis so as to demonstrate the commercial superiority of his products
and thereby, to induce the parties to buy the patents from him. With this objective, he is
currently thinking of manufacturing and selling ‘Lavex’. He will not give up his full-time
job; he will supervise and guide ‘Lavex’ production and sales during his spare time.
Bhatt has already spent ` 30,000 in developing the product. He proposes to buy the component
from other parties and keep the production activity to a minimum. The minimum equipment

Contd...

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