CAPITAL PROJECT

Capital Project

Capital Project

Capital Budget Plan

To demonstrate the construction and use of the cash budget, consider Sarasota County Public Hospital, a regional district hospital in Florida. Sarasota's sales are highly seasonal, peaking in the months of March through May. Roughly 30 percent of Sarasota's sales are collected one month after the sale, 50 percent two months after the sale, and the remainder during the third month following the sale.

Sarasota attempts to pace its purchases with its forecast of future sales. Purchases generally equal 75 percent of sales and are made two months in advance of anticipated sales. Payments are made in the month following purchases. For example, June sales are estimated at $100,000, thus April purchases are .75 X $l00, 000 = $75,000. Correspondingly, payments for purchases in May equal $75,000. Wages, salaries, rent, and other cash expenses are recorded in Table 1, which gives Sarasota's cash budget for the six-month period ended in June 1998. Additional expenditures are recorded in the cash budget related to the purchase of equipment in the amount of $14,000 during February and the repayment of a $12,000 loan in May. In June, Sarasota will pay $7,500 interest on its $150,000 in long-term debt for the period of Oct-Sep, 2011. Interest on the $12,000 short-term note repaid in May for the period January through May equals $600 and is paid in May.

Sarasota presently has a cash balance of $20,000 and wants to maintain a minimum balance of $10,000. Additional borrowing necessary to maintain that minimum balance is estimated in the final section of Table 1. Borrowing takes place at the beginning of the month in which the funds are needed. Interest on borrowed funds equals 12 percent per annum, or 1 percent per month, and is paid in the month following the one in which funds are borrowed. Thus, interest on funds borrowed in January will be paid in February equal to 1 percent of the loan amount outstanding during January. The financing-needed line on Sarasota's cash budget indicates that the firm will need to borrow $36,350 in February, $65,874 in March, $86,633 in April, and $97,599 in May. Only in June will the firm be able to reduce its borrowing to $79,875. Note that the cash budget indicates not only the amount of financing needed during the period but also when the funds will be needed (Block, 1992).

Table 1

Sarasota County Public Hospital

Cash Budget Plan

Ended September ...