Adams, Loomis, and Vogt, three law students who have joined together to open a law practice, are struggling to manage their cash flow. They haven’t yet built up sufficient clientele and revenues to support their legal practice’s ongoing costs. Initial costs, such as advertising, renovations to their premises, and the like, all result in outgoing cash flow at a time when little is coming in. Adams, Loomis, and Vogt haven’t had time to establish a billing system since most of their clients’ cases haven’t yet reached the courts, and the lawyers didn’t think it would be right to bill them until “results were achieved.” Unfortunately, Adams, Loomis, and Vogt’s suppliers don’t feel the same way. Their suppliers expect them to pay their accounts payable within a few days of receiving their bills. So far, there hasn’t even been enough money to pay the three lawyers, and they are not sure how long they can keep practicing law without getting some money into their pockets.
Instructions
Can you provide any suggestions for Adams, Loomis, and Vogt to improve their cash management practices?
Mayfield Company expects to have a cash balance of $46,000 on January 1, 2010. These are the relevant monthly budget data for the first two months of 2010.
1. Collections from customers: January $75,000, February $146,000
2. Payments to suppliers: January $40,000, February $75,000
3. Wages: January $30,000, February $40,000. Wages are paid in the month they are incurred.
4. Administrative expenses: January $21,000, February $31,000. These costs include depreciation of $1,000 per month. All other costs are paid as incurred.
5. Selling expenses: January $15,000, February $20,000. These costs are exclusive of depreciation. They are paid as incurred.
6. Sales of short term investments in January are expected to realize $12,000 in cash.
Mayfield has a line of credit at a local bank that enables it to borrow up to $25,000.
The company wants to maintain a minimum monthly cash balance of $20,000.
Instructions
Prepare a cash budget for January and February.