What is the net cash flow in August? We have a company which had been growing at a rate of 8% but is now expected to be growing at 5% from this month (August) on (i.e. the growth from August to September is 5% while the growth from July to August is 8%). The company collects 20% of its sales COD(cash on delivery), 30% of the sales in the month following the sale, and 45% of the sales in the second month following the sale while 5% is considered unrecoverable. Manpower costs are $2000 per month plus 20% of sales. Inventory purchases are 35% of the next month's sales. Assuming, that there is a one time receipt of $10,000 cash in August, that there are no other money-in and money-out flows, that the Sales in August will be $250,000.

Expert Answers

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To find the Net Cash Flow for August:

First, calculate Sales Revenue (SR) for June and July.

Use the following formulae:

Single period: Sales/ (1+growth rate)

Two or more periods: Sales/ (1+growth rate) ^Period

August SR: $250,000

July SR: $250,000/1.08 = $231,481.48

June SR: $250,000/1.08^2 = $214,334.70

Next, calculate Gross Sales (Cash Inflows) for June and July.

July 0.45*214334.70 = 96450.62

Add (+)

June 0.3*231481.48 = 69444.44

= Sales $165,895.06

Add (+)

COD 50,000.00

Add (+)

Cash Receipt 10,000.00

Total Gross Sales* $225,895.06

Finally, calculate Operating Expenses (Cash Outflows).

Manpower costs of 50,000.00 ($2,000+20% of sales)

Add (+)

Inventory purchases** 91,875.00 (35% of next mo. sales)

=Total Op. Expenses $143,875.00

Subtract (-) Total OE from GS

=Total Net Cash Flows $82,020.06

*Unrecoverable or doubtful accounts must be entered as a double ledger 1) Allowance for doubtful accounts; 2) Unrecoverable

In this case unrecoverable accounts = 5% or $12,500.00

**Apply inventory purchases formula:

Percentage of next month sales x Sales x Growth Rate

or 0.35*250000*1.05

Approved by eNotes Editorial Team
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The sales revenue in the month of August is $250000. In the period prior to August, the company has been growing at a rate of 8% per month. This gives a sales revenue of $250000/1.08 = $231481.48 in July and a sales revenue of $250000/1.08^2 = $214334.70 in the month of June.

The company collects 20% of its sales COD(cash on delivery), 30% of the sales in the month following the sale, and 45% of the sales in the second month following the sale while 5% is considered unrecoverable.

In the month of August there is a cash inflow from the sales in the month of June and July. The two add up to give 0.3*231481.48 + 0.45*214334.70 = $165895.05. In addition to this 20% of the sales in August are received as cash, this is $50000.

The gross inflow from sales in the month of August is $215895.05. There is a one-time cash receipt of $10000 that makes the gross inflow $225895.05

The outflows in the month of August are manpower costs of $2000, 20% of sales which is $50000, inventory purchases that are 35% of the following month's sales or 0.35*250000*1.05 = $91875

The outflows add up to $143875

Subtracting the outflow from the gross inflow gives the net inflow which is $82020.05

The net cash flow in August is an inflow of $82020.05

 

Approved by eNotes Editorial Team

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