Table 3.10 presents Coulson Industries’ cash budget, based on the data already developed. At the end of September, Coulson’s cash balance was $50,000, and its notes payable and marketable securities equaled $0.7 The company wishes to maintain, as a reserve for unexpected needs, a minimum cash balance of $25,000.
For Coulson Industries to maintain its required $25,000 ending cash balance, it will need total borrowing of $76,000 in November and $41,000 in December. In October the firm will have an excess cash balance of $22,000, which can be held in an interest earning marketable security. The required total financing figures in the cash budget refer to how much will be owed at the end of the month; they do not represent the monthly changes in borrowing. The monthly changes in borrowing and in excess cash can be found by further analyzing the cash budget. In October the $50,000 beginning cash, which becomes $47,000 after the $3,000 net cash outflow, results in a $22,000 excess cash balance once the $25,000 minimum cash is deducted. In November the $76,000 of required total financing resulted from the $98,000 net cash outflow less the $22,000 of excess cash from October. The $41,000 of required total financing in December resulted from reducing November’s $76,000 of required total financing by the $35,000 of net cash inflow during December. Summarizing, the financial activities for each month would be as follows:
October: Invest the $22,000 excess cash balance in marketable securities.
November: Liquidate the $22,000 of marketable securities and borrow $76,000 (notes payable).
December: Repay $35,000 of notes payable to leave $41,000 of outstanding required total financing.