Cash Budgets 

A cash budget helps a company plan and control the movement of cash into and out of the company. It is important for a company to have a good understanding of its cash needs in order to identify instances of cash idleness or shortage. In this Application, you will use the information on cash budgets outlined in the Resources to prepare a cash budget for Gladiator Robotics based on the data provided in the scenario below.

You will set up and use an Excel spreadsheet for all your calculations for the problems below, and the spreadsheet you develop should be what you turn in for the Application. Note: The Resources section includes tutorials for those who might need help in designing and using an Excel spreadsheet.

Gladiator Robotics

Read the information below and complete Parts I and II

Part-1

The board of directors of Gladiator Robotics is considering whether or not to donate to a national robotics convention for high school students interested in technology and engineering. The company needs you to prepare a monthly cash budget to determine the available cash reserves for January, February, and March. Relevant data appear below.

All sales are on account. Collections are expected to be 60% in the month following the sale, 25% in the second month following the sale, and 10% in the third month following the sale. Five percent are deemed to be uncollectible.

The company sold equipment in February for $20,000 and received a dividend on investments of $4,000 in March.

Cash on hand as of January 1st is $14,000.

Material purchases are as follows:

Material purchases are paid 50% in the month purchased and the remainder in the following month.

Other disbursements are paid in the month incurred.

The company wants to maintain a cash balance at the end of each month of at least $10,000. It has a $250,000 line of credit at the bank and will borrow from the bank in order to maintain this balance.

Part I: Prepare a monthly cash budget for January, February, and March following the template on page 261 in the textbook.

Part II: Analyze the cash budget and make recommendations to the board of directors of Gladiator Robotics regarding your findings. Be specific regarding possible causes and remedies (if applicable).

Cash Budget Analysis

Part II:

Analysis of Cash Budget

From the cash budget of Gladiator Robotics, it can be de determined that the cash position of the firm is not much effective as the firm has to use the credit limit in budget months to maintain the minimum cash balance of $10000. The firm is also not able to collect all its sales, which is affecting its cash position and reducing the ability to have the sufficient fund for each month in order to maintain the minimum required cash balance for organizational liquidity. The cash collection policy of the firm is also not effective as it has quite long period, while the organization has to pay all its cash obligations in 1 or 2 months, which is also a reason for the decline in cash position of the firm.

From the cash budget analysis, it could also be determine that the labor and wage expenses of the firm are quite high, which is the reason for a declining in the cash position of the firm. At the same time, the purchase of capital equipment of $50000 in January also declined the cash position of the firm, otherwise the firm will be able to maintain its cash position in first two months and will be required to obtain loan in the month of March only (Mowen, Hansen & Heitger, 2008). Due to lack o required cash balance, the firm is required to take the loan of 16250 and 116500 in the month of February and March respectively. It shows that the firm does not have sufficient fund to donate to national robotics convention for high school students interested in technology and engineering.

With the analysis of cash budget of Gladiator, it could be recommended to the management that the firm should not take the decisions of donating the national robotic convention as it will make the cash position worse of the firm. At the same time, the firm should consider to decline the labor and wage expenses as these are contributing a lot in making the cash position worse. The decline in labor and wage expenses would be effective for the firm to increase its cash position and to make the decision of donation in future (Stice, Stice & Swain, 2010). The cash collection policies of the firm should be cut down and to reduce the uncollectable amount, which is also effective to increase the significance of firm to maintain its cash position.

References

• Mowen, M.M., Hansen, D.R. & Heitger, D.L. (2008). Cornerstones of Managerial Accounting (3rd ed.). USA: Cengage Learning.
• Stice, E.K., Stice, J.D. & Swain, M.R. (2010). Accounting: Concepts and Applications (11th ed.). USA: C