Helen Bowers, owner of Helen’s Fashion Designs, is planning to request a line of credit from her bank. She has estimated the following sales forecasts for the firm for parts of 2006 and 2007:

May 2006                             $180,000

June                                       180,000

July                                        360,000

August                                  540,000

September                          720,000

October                                360,000

November                            360,000

December                            90,000

January 2007                      180,000

Estimates regarding payments obtained from the credit department are as follows: collected within the month of sale, 10 percent; collected the month following the sale, 75 percent; collected the second month following the sale, 15 percent. Payments for labor and raw materials are made the month after these services were provided. Here are the estimated costs of labor plus raw materials:

May 2006                      $ 90,000

June                                 90,000

July                                 126,000

August                           882,000

September                   306,000

October                        234,000

November                   162,000

December                   90,000

General and administrative salaries are approximately $27,000 a month; lease payments under long-term leases are $9,000 a month; depreciation charges are $36,000 a month; miscellaneous expenses are $2,700 a month; income tax payments of $63,000 are due in both September and December; and a progress payment of $180,000 on a new design studio must be paid in October. Cash on hand on July 1 will be $132,000, and a minimum cash balance of $90,000 should be maintained throughout the cash budget period. 

a. Prepare a monthly cash budget for the last 6 months of 2006.

b. Prepare monthly estimates of the required financing or excess funds—that is, the amount of money Bowers will need to borrow or will have available to invest. 

c. Now suppose receipts from sales come in uniformly during the month (that is, cash receipts come in at the rate of 1/30 each day), but all outflows must be paid on the 5th. Will this affect the cash budget; that is, will the cash budget you prepared be valid under these assumptions? If not, what could be done to make a valid estimate of the peak financing requirements? No calculations are required, although if you want to, you can use calculations to illustrate the effects. 

d. Bowers sales are seasonal, and it produces on a seasonal basis, just ahead of sales. Without making any calculations, discuss how the company’s current and debt ratios would vary during the year if all financial requirements are met with shortterm bank loans. Could changes in these ratios affect the firm’s ability to obtain bank credit?