Rockwell Company is a fast-growing company with monthly sales for the current year estimated at a relatively steady upward trend. Past history has shown that all sales are collected within two months with negligible uncollectibles. The product for a given month is purchased partially in the month before sale and the rest during the month of sale and is paid for over a two-month period. Property and income taxes are paid quarterly while other expenses are paid as incurred. The company has a desired ending cash balance for each month of $150,000, and when necessary, borrows to meet shortfalls and invests overages.The success of the company has been sudden and Ms. Harrison, the controller, is concerned about meeting the goals of the company without getting into serious short-term financial

Question

difficulties. As a result, she has been very conscientious about preparing the cash budget and keeping it up-to-date as conditions warrant.Required:Why is cash budgeting important for a rapidly expanding firm such as Rockwell Company?

What will be an ideal response?

Answer 1

In any firm, but especially a rapidly expanding firm, there are timing differences between payments of cash and receipts of cash. This is especially true for increasing product purchases which precede the increasing sales and are paid for frequently before the cash has been received from the sales. If trends in receipts and disbursements are not monitored, the firm could find itself with a growing short-term debt to both meet bills and the minimum desired cash balance.