Lahore School of Economics

Financial Management II
Working Capital Management – 3
Assignment 15 Solution
Examples

Q1)
Q2)
March April May June July

Forecast sales $ 60 $ 60 $ 70 $ 80 $ 100

Cash sales (50%) $ 35 $ 40 $ 50

Collections of A/R:
Lagged 1 month (25%) 15 17.5 20
Lagged 2 months (25%) 15 15 17.5
Dividend received 5
Sale of truck 10
Total cash receipts $ 70 $ 72.5 $ 97.5

Purchases $ 42 $ 42 $ 49 $ 56 $ 70
Payments of A/P:
Lagged 1 month (90%) $ 37.8 $ 44.1 $ 50.4
Lagged 2 months (10%) 4.2 4.2 4.9
S, G & A expenses 17 18 20
Interest payments 9
Sinking fund payments 50
Cash dividend payments 10
Capital expenditure 40
Tax payment 1
Total cash disbursements $ 59 $ 106.3 $ 145.3

Net cash flow $ 11 $ (33.8) $ (47.8)

Lon requirement or cash surplus:

Cash start of the month $ 20 $ 31 $ (2.8)
Cumulative cash $ 31 $ (2.8) $ (50.6)
Target cash balance $ 20 $ 20 $ 20

Cash surplus $ 11
Loan requirement $ (22.8) ($ 70.6)

Problems for Assignment

Q1)
April May June July August

Forecast sales $ 65 $ 60 $ 70 $ 100 $ 100

Cash sales (50%) $ 32.5 $ 30 $ 35 $ 50 $ 50

Collections of A/R:
Lagged 1 month (25%) 16.25 15 17.5 25
Lagged 2 months (25%) 16.25 15 17.5
Total cash receipts $ 66.25 $ 82.5 $ 82.5
Q2) a.
May June July August September October November December January
Collections and purchases worksheet
Sales (gross) $180,000 $180,000 $360,000 $540,000 $720,000 $360,000 $360,000 $90,000 $180,000
Collections
During month of sale 18,000 18,000 36,000 54,000 72,000 36,000 36,000 9,000
During 1st month after sale 135,000 135,000 270,000 405,000 540,000 270,000 270,000
During 2nd month after sale 27,000 27,000 54,000 81,000 108,000 54,000
Total collections $198,000 $351,000 $531,000 $657,000 $414,000 $333,000
Purchases
Labor and raw materials $90,000 $90,000 $126,000 $882,000 $306,000 $234,000 $162,000 $90,000
Payments for labor and raw materials $90,000 $90,000 $126,000 $882,000 $306,000 $234,000 $162,000

Cash gain or loss for month

Collections $198,000 $351,000 $531,000 $657,000 $414,000 $333,000
Payments for labor and raw materials 90,000 126,000 882,000 306,000 234,000 162,000
General and administrative salaries 27,000 27,000 27,000 27,000 27,000 27,000
Lease payments 9,000 9,000 9,000 9,000 9,000 9,000
Miscellaneous expenses 2,700 2,700 2,700 2,700 2,700 2,700
Income tax payments 63,000 63,000
Design studio payment 180,000
Total payments $128,700 $164,700 $983,700 $524,700 $272,700 $263,700
Net cash gain (loss) during month $69,300 $186,300 ($452,700) $132,300 $141,300 $69,300

Loan requirement or cash surplus

Cash at start of month $132,000 $201,300 $387,600 ($65,100) $67,200 $208,500
Cumulative cash $201,300 $387,600 ($65,100) $67,200 $208,500 $277,800
Target cash balance $90,000 $90,000 $90,000 $90,000 $90,000 $90,000
Cumulative surplus cash or loans
outstanding to maintain $90,000 target cash balance $111,300 $297,600 ($155,100) ($22,800) $118,500 $187,800

b. The cash budget indicates that Helen will have surplus funds available during July, August, November, and
December. During September the company will need to borrow $155,100. The cash surplus that accrues
during October will enable Helen to reduce the loan balance outstanding to $22,800 by the end of October.

Q3)
August September October November December

Forecast sales $ 100 $ 200 $ 400 $ 300 $ 200

Cash sales (20%) $ 20 $ 40 $ 80 $ 60 $ 40

Collections of A/R:
Lagged 1 month (50%) 50 100 200 150
Lagged 2 months (30%) 30 60 120
Other cash receipts 30
Total cash receipts $ 210 $ 320 $ 340

Purchases $ 70 $ 140 $ 280 $ 210 $ 140

Cash purchases (10%) $7 $ 14 $ 28 $ 21 $ 14
Payments of A/P:
Lagged 1 month (70%) 49 98 196 147
Lagged 2 months (20%) 14 28 56
Rent payments 5 5 5
Wages and salaries 48 38 28
Tax payments 25
Fixed-asset outlays 130
Interest payments 10
Cash dividend payments 20
Principal payments 20
Total cash disbursements $ 213 $ 418 $ 305
Net cash flow $ (3) $ (98) $ 35

Lon requirement or cash surplus:

Cash start of the month $ 50 $ 47 $ (51)
Cumulative cash $ 47 $ (51) $ (16)
Target cash balance $ 25 $ 25 $ 25

Cash surplus $ 22
Loan requirement $ (76) $ (41)