3. From the information given below, prepare a Cash budget of Chatterjee Ltd. for the first quarter ending on 30th June 2021: 16
(a) Sales are both on Credit and Cash. Credit Sales being 3/4th of the Sales.
(b) Realisation from Debtors are 25% in the month of sale, 60% in the month following that and the balance in the month after that.
(c) Purchases are paid for in the same month.
(d) The company has outstanding debentures of Rs. 3 lakh on 1st April 2021, which carry interest @ 15% p.a. payable on a quarterly basis on the last date of each quarter. 20% of the debentures are due for redemption on 30th June 2021.
(e) Anticipated office cost for three-month period are April—Rs. 20,000; May—Rs. 15,000 and June—Rs. 25,000.
(f) The opening cash balance of Rs. 20,000 is the minimum cash balance to be maintained. Deficits have to be met by borrowals in multiples of Rs. 20,000 on which interest on monthly basis has to be paid on the first date of the subsequent month, at 12% p.a. Interest is paid for a minimum period of a month.
(g) Sales forecast for the different months for the year 2021 are: February—Rs. 1,60,000, March—Rs. 1,50,000, April—Rs. 1,40,000, May—Rs. 1,80,000, June—Rs. 2,00,000.
(h) Purchases for the different month for the year 2021 are: February—Rs. 1,20,000, March—Rs. 1,12,000, April—Rs. 1,44,000, May—Rs. 1,60,000, June—Rs. 80,000.
SOLUTION:
To prepare a cash budget for Chatterjee Ltd. for the first quarter ending on 30th June 2021, we need to analyze the given information and calculate the cash inflows and outflows for each month. Let’s break down the information and calculate the cash budget.
Given information: Opening cash balance: Rs. 20,000 Minimum cash balance: Rs. 20,000 Debentures outstanding: Rs. 3,00,000 Debenture interest rate: 15% p.a. (payable quarterly) Debenture redemption (20%): Due on 30th June 2021
Sales forecast: February: Rs. 1,60,000 March: Rs. 1,50,000 April: Rs. 1,40,000 May: Rs. 1,80,000 June: Rs. 2,00,000
Purchase forecast: February: Rs. 1,20,000 March: Rs. 1,12,000 April: Rs. 1,44,000 May: Rs. 1,60,000 June: Rs. 80,000
Office costs: April: Rs. 20,000 May: Rs. 15,000 June: Rs. 25,000
Now, let’s prepare the cash budget month by month:
- April 2021: Sales: Rs. 1,40,000 (3/4th on credit, 1/4th cash) Cash Sales: Rs. 35,000 (1/4th of Rs. 1,40,000) Collections from Debtors (March sales): Rs. (60% of 3/4th of Rs. 1,50,000) = Rs. 67,500 Realization from Debtors (April sales): Rs. (25% of 3/4th of Rs. 1,40,000) = Rs. 26,250 Purchases: Rs. 1,44,000 Office Costs: Rs. 20,000 Interest Payment (Debentures): Rs. (3,00,000 * 15% / 4) = Rs. 11,250 Cash Inflows: Rs. 35,000 + Rs. 67,500 + Rs. 26,250 = Rs. 1,28,750 Cash Outflows: Rs. 1,44,000 + Rs. 20,000 + Rs. 11,250 = Rs. 1,75,250 Net Cash Flow: Rs. 1,28,750 – Rs. 1,75,250 = (-Rs. 46,500)
- May 2021: Sales: Rs. 1,80,000 (3/4th on credit, 1/4th cash) Cash Sales: Rs. 45,000 (1/4th of Rs. 1,80,000) Collections from Debtors (April sales): Rs. (60% of 3/4th of Rs. 1,40,000) = Rs. 67,500 Realization from Debtors (May sales): Rs. (25% of 3/4th of Rs. 1,80,000) = Rs. 33,750 Purchases: Rs. 1,60,000 Office Costs: Rs. 15,000 Interest Payment (Debentures): Rs. (3,00,000 * 15% / 4) = Rs. 11,250 Cash Inflows: Rs. 45,000 + Rs. 67,500 + Rs. 33,750 = Rs. 1,46,250 Cash Outflows: Rs. 1,60,000 + Rs. 15,000 + Rs. 11,250 = Rs. 1,86,250 Net Cash Flow: Rs. 1,46,250 – Rs. 1,86,250 = (-Rs. 40,000)
- June 2021: Sales: Rs. 2,00,000 (3/4th on credit, 1/4th cash) Cash Sales: Rs. 50,000 (1/4th of Rs. 2,00,000) Collections from Debtors (May sales): Rs. (60% of 3/4th of Rs. 1,80,000) = Rs. 67,500 Realization from Debtors (June sales): Rs. (25% of 3/4th of Rs. 2,00,000) = Rs. 37,500 Purchases: Rs. 80,000 Office Costs: Rs. 25,000 Interest Payment (Debentures): Rs. (3,00,000 * 15% / 4) = Rs. 11,250 Debenture Redemption: Rs. (3,00,000 * 20%) = Rs. 60,000 Cash Inflows: Rs. 50,000 + Rs. 67,500 + Rs. 37,500 = Rs. 1,55,000 Cash Outflows: Rs. 80,000 + Rs. 25,000 + Rs. 11,250 + Rs. 60,000 = Rs. 1,76,250 Net Cash Flow: Rs. 1,55,000 – Rs. 1,76,250 = (-Rs. 21,250)
Finally, let’s summarize the cash budget for the first quarter ending on 30th June 2021:
April: (-Rs. 46,500) May: (-Rs. 40,000) June: (-Rs. 21,250)
Based on the cash budget, the company is experiencing a cash deficit in all three months. It will need to arrange for borrowings in multiples of Rs. 20,000 to cover the deficits. Additionally, interest will need to be paid on the borrowings at a rate of 12% p.a. on the first date of the subsequent month for a minimum period of one month.
Use any format of cash budget from various methods available.
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