Cash Disbursements for Direct Operating Costs

One of a firm’s major cash disbursements is its payments for the goods it sells to its customers. For retailers, this is the cost of the goods sold. For factories, it is the cost of direct production labor plus raw materi- als and components that are used to manufacture the goods sold.

The cost of goods sold by retailers can be closely approximated by multiplying the dollar value of sales by a percentage based on past records. Payments may be made at the time of purchasing the goods or their delivery, or one or more periods later.

Cash Budgeting ❧ 255

Example 8.2: An analysis of the records of Gloriana Stores (see preceding example) shows that the cost of goods they sell has averaged 70 percent of the dollar value of sales. To save inventory holding costs, Gloriana schedules its receipts of goods for the beginning of the month in which the goods are expected to be sold. (Note that this is an oversimplification to demonstrate a programming method. In practice, stores cannot operate without inventories, and inventory holding costs are a major expense of doing business. Inventory holding costs are included in a later example.)

Gloriana pays for 10 percent of its purchased goods in the same month that the suppliers deliver the goods. The store pays for 40 percent of its purchased goods in the month following delivery and for 50 percent of its purchased goods two months after delivery. Sales during November and December of last year and forecast sales for the first six months of next year are as given in Example 8.1. What are the cash outflows to pay for purchased goods for each of the first six months of next year?

Solution: Figure 8-2 shows a spreadsheet solution. The dollar values for actual sales in November and December and the forecast sales for the first six months of next year are shown in Cells B4:I4. The monthly costs of purchased goods are evaluated by entering =$B$5*B4 in Cell B6 and copying the entry to C6:I6. The entries for calculating the monthly cash outflows to pay for them are =$B$8*D6 in Cell D8, =$B$9*C6 in Cell D9, and =$B$10*B6 in Cell D10. These entries are copied to E8:I8, E9:I9 and E10:I10, respectively.

Figure฀8-2

Cash Outflows to Pay for Goods Purchased

1 Example 8.2: GLORIANA STORES

2 Expected Monthly Payments for Goods Purchased during the First Six Months of Next Year

May June 4 Sales

3 November December January February

March

April

$ 600,000 $ 800,000 $ 500,000 $ 450,000 $ 550,000 $ 600,000 $ 625,000 $ 600,000 Cost of Purchased Goods,

5 Percent of Sales

Cost of Purchased Goods, 6 Dollars

$ 420,000 $ 560,000 $ 350,000 $ 315,000 $ 385,000 $ 420,000 $ 437,500 $ 420,000 Payments for Purchased

7 Goods

Pct. Paid

8 Same month as purchase

$ 35,000 $ 31,500 $ 38,500 $ 42,000 $ 43,750 $ 42,000 9 Lagged 1 month

$ 224,000 $ 140,000 $ 126,000 $ 154,000 $ 168,000 $ 175,000 10 Lagged 2 months

11 Cash Outflow to Pay for Goods Sold $ 469,000 $ 451,500 $ 339,500 $ 353,500 $ 404,250 $ 427,000

Key Cell Entries

B6: =$B$5*B4, copy to C6:I6

Cost for goods is 70% of sales.

D8: =$B$8*D6, copy to E8:I8 Payments for goods purchased in current month. D9: =$B$9*C6, copy to E9:I9

Payments for goods purchased last month. D10: =$B$10*B6, copy to E10:I10

Payments for goods purchased two months ago. D11: =SUM(D8:D10), copy to E11:I11

Sum of current cash outflow for goods purchased.

256 ❧ Corporate Financial Analysis with Microsoft Excel ®

Cash Disbursements for Direct Operating Costs