Receipts by pattern, payments by pattern, then borrow or invest

Kettle Creek Foods — the first quarter

Kettle Creek Foods Inc. budgets the following sales: November 250,000, December 280,000, January 300,000, February 360,000, March 420,000, April 480,000. Its customers pay 30 % in the month of sale, 60 % the following month and 10 % the month after that. Purchases are 60 % of the next month’s sales, paid the month after purchase. Other cash costs run 70,000 a month, a 200,000 packing line is paid for in March, opening cash is 40,000 and the company keeps a minimum balance of 30,000 by borrowing on its line of credit.

Collections lag sales. January’s collections are 30 % of January, 60 % of December and 10 % of November:

$$0.3\times 300,000+0.6\times 280,000+0.1\times 250,000=90,000+168,000+25,000=283,000$$

February: $0.3\times 360,000+0.6\times 300,000+0.1\times 280,000=316,000$. March: $0.3\times 420,000+0.6\times 360,000+0.1\times 300,000=372,000$. In every month collections are below sales, because sales are growing and most of each month’s sales are collected later.

Payments lag purchases, which lead sales. December’s purchases were 60 % of January’s sales, $0.6\times 300,000=180,000$, paid in January. January’s purchases ($0.6\times 360,000=216,000$) are paid in February; February’s ($0.6\times 420,000=252,000$) in March.

                        January    February     March
Opening cash             40,000      73,000    103,000
Collections             283,000     316,000    372,000
Purchase payments      (180,000)   (216,000)  (252,000)
Other cash costs        (70,000)    (70,000)   (70,000)
Capital spending              —           —   (200,000)
Cash before financing    73,000     103,000    (47,000)
Borrowing                     —           —     77,000
Ending cash              73,000     103,000     30,000

March ends 47,000 below zero before financing; to restore the 30,000 minimum the company borrows 77,000. The budget has done its job three months early: the treasurer arranges the line in January, not in the week the packing line is invoiced. Depreciation appears nowhere — a cash budget contains only cash.

Boreal Bikes — the budgeted cash-flow statement

A cash budget is built by months and by pattern. The budgeted cash-flow statement is built the other way, from the budgeted income statement (lesson 8.7) and the projected balance sheet (lesson 9.6) using the indirect method — and the two views must agree on ending cash.

Boreal’s 2026 budget: net income 488,400, depreciation 200,000; receivables rise 600,000 → 665,753 (+65,753), inventory 450,000 → 488,219 (+38,219), payables 300,000 → 325,479 (+25,479).

Net income                                    488,400
Add: depreciation                             200,000
Increase in receivables                       (65,753)
Increase in inventory                         (38,219)
Increase in payables                           25,479
Cash from operating activities                609,907
Investing: capital spending                  (700,000)
Financing: dividends (150,000) + new borrowing 140,093   (9,907)
Net change in cash                           (100,000)
Cash, 1 January 2026                          250,000
Cash, 31 December 2026                        150,000

Ending cash is exactly the 150,000 minimum the projected balance sheet assumed, and the 140,093 of new borrowing is exactly lesson 9.6’s external funds needed. That is not a coincidence — it is the check. The three budgeted statements are one model seen three ways: the income statement supplies net income and depreciation, the balance sheet supplies the working-capital changes and the plug, and the cash-flow statement proves that, with that plug, the cash lands where the policy said it would. If it did not reconcile, one of the three would be wrong, and the cash-flow statement is where the error shows.