The Oxford Company has budgeted sales revenues as follows:

July August September

Credit sales $30,000 $24,000 $18,000

Cash sales 18,000 51,000 39,000

Total sales $48,000 $75,000 $57,000

Past experience indicates that 60% of the credit sales will be collected in the month of sale and the remaining 40% will be collected in the following month.

Purchases of inventory are all on credit and 50% is paid in the month of purchase and 50% in the month following purchase. Budgeted inventory purchases are $65,000 in July, $45,000 in August, and $21,000 in September.

Other budgeted cash receipts: (a) sale of plant assets for $12,350 in August, and (b) sale of new common stock for $16,850 in September. Other budgeted cash disbursements: (a) operating expenses of $6,750 each month, (b) selling and administrative expenses of $12,500 each month, (c) dividends of $19,000 will be paid in August, and (d) purchase of equipment for $6,000 cash in September.

The company has a cash balance of $10,000 at the beginning of August and wishes to maintain a minimum cash balance of $10,000 at the end of each month. An open line of credit is available at the bank and carries an annual interest rate of 12%. Assume that all borrowing is done on the first day of the month in which financing is needed and that all repayments are made on the last day of the month in which excess cash is available. Also assume that there is no outstanding financing as of August 1.


1. What are the three sections of a Cash Budget, and what is included in each section?

2. Why is a Cash Budget so vital to a company?

3. What are the five basic principles of cash management that a company can follow in order to improve its chances of having adequate cash?