Southland Soap Co.: Cash Budget Decision
Southland Soap Co. is a small manufacturer. It is preparing a cash budget for the three months July–September. June sales were $48,000. Sales are 60% cash and 40% credit; credit customers pay in the month after sale. Purchases of materials are 50% of the next month's sales and are paid in the month of purchase. Other cash expenses are $9,000 per month. The bank balance on 1 July is $6,200. The owner plans to buy a $15,000 soap-moulding machine in August, paying cash. July sales are budgeted at $52,000; August $55,000; September $60,000; October $64,000. A loan repayment of $2,500 is due in September. The owner is worried the cash balance will go negative in August.
1. Prepare a cash budget for July, August and September, showing closing bank balances.
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| July | August | September | |
|---|---|---|---|
| Opening bank | $6,200 | $20,100 | $19,900 |
| Cash sales (60% of month) | $31,200 | $33,000 | $36,000 |
| Credit collections (40% of prior month) | $19,200 | $20,800 | $22,000 |
| Total receipts | $50,400 | $53,800 | $58,000 |
| Materials (50% of next month) | $27,500 | $30,000 | $32,000 |
| Other cash expenses | $9,000 | $9,000 | $9,000 |
| Machine purchase | $0 | $15,000 | $0 |
| Loan repayment | $0 | $0 | $2,500 |
| Total payments | $36,500 | $54,000 | $43,500 |
| Closing bank | $20,100 | $19,900 | $34,400 |
Reasoning: receipts follow the cash/credit pattern; payments for materials are based on the next month’s sales because purchases are 50% of next month’s sales and paid in the month of purchase. The machine and loan are included in the month they are paid.
2. Explain whether the owner's worry about August is justified, and recommend one action she could take if the bank balance was forecast to be negative.
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The worry is not justified by this budget: August closes at $19,900, which is positive. However, August is the tightest month because the $15,000 machine is paid then. The forecast depends on sales and debtors paying on time. If the balance were forecast to be negative, she could delay the machine purchase, arrange an overdraft facility in advance, chase debtors, negotiate longer supplier terms, or reduce drawings. The best action depends on which cash flow is most flexible.
3. Discuss one non-financial factor in deciding whether to buy the machine in August.
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One factor is whether the machine will be ready for the peak season. If August is the peak, installing it may disrupt production and staff training; delaying until October may avoid lost sales. Other factors include product quality, staff safety, and whether the machine creates capacity for future sales. These non-financial factors can change the timing even when the cash budget is positive.