SPEAKER: The cash budget is an essential tool in effectively managing working capital for any company. Basically, a cash budget projects the cash receipts and the cash disbursements for several periods in the future so that managers can tell what the net change is going to be. And decide whether they're going to have surplus cash available, in which case, they would invest the money. Or they're going to have to borrow money, in which case, they would be speaking to their bank to get a working capital loan perhaps to finance inventory.
So we're looking at Problem 14-3, which is a good example of a cash budget. And you see we have some data up here, we have eight months of sales data. We do have these percentages -- 10%, 60%, 30%. Well, that's the collection pattern for the company. Basically, what happens is they collect 10% of the current month sales in the month that sale takes place. They collect 60% of the sales within 30 days. And they collect 30% within 60 days. We also have the purchases that take place, which are 60% of the projected sales 2 months in the future. And that of course, the policy is we take and pay last month's purchases, and we pay them this month.
So one tool I want to use to help look at this cash budget is under the Formulas tab we have Trace Precedence. What this does is it allows me to select a sale, and see what goes into the input to that sale. So I'm on the month of sales, 10% for January. Trace precedence, you see that basically 10% times the $190,000, equals the $19,000. If I move to the next sale, first month, 60% of the sales, this is of one month after the sale. Trace precedence, we now have 60%, times last month's sales, or $105,000. And the third one would be 2 months ago, times the 30%, to give us our collections for the month. And then, the total just sums those three numbers to give us the total collections for that month.
And if I were to go across, you would see that that pattern basically repeats itself all the way across, for February, March, April, May, June, and July. Purchases are based on the idea of 60% of the forecasted sales 2 months from the month we're in. So we have 60% times the March sales, and we're going to invest $81,000 in inventory in January based on what the expected sales are going to be in March. And again, if I move to February, you see that pattern just keeps repeating itself as we go across.
The payments, we just pay whatever the last month was we pay it this month. So if I go to payments and trace precedence, you will see that the money for purchases in December is actually paid in January. The money for purchases in January is paid in February. And et cetera, going all the way across. Total cash receipts is equal to what we have up here. And as you go across, you keep adding these numbers together. It's going to be the total collections, minus the purchases. And you'll see that it's these numbers here.
So that gives us our total cash receipts. Then, we go to cash disbursements. Our purchases have already been defined up here. They're moved down. We have some additional expenses that are just entered in -- rent, other expenditures, tax deposits are given in the problem, but basically, you're making your quarterly tax payments. Short- term interest on borrowing is a little bit of a complicated formula. But we pay 12% of the amount borrowed, which is this amount of down here -- $55,000. And then, we just take and divide that by 12 to come up with the $550 for short- term interest. And we add those together to come up with the total disbursements. And we do that all the way across.
And then, we look at the net monthly change, which is basically going to be the cash receipts, minus the disbursements. So we have a net monthly change of $88,000 in January, and $67,500 in February. And then, we start going negative. Well, once we start going negative, we're beginning to use up our ending cash balance. So at some point, we end up having to actually borrow some additional money. We may be headed into the build up of inventory for the selling season, that might be approaching. And you take the difference between those two, and you -- excuse me. In this case for January, it's given as the beginning balance. And this amount here is equal to the previous balance for January. So this is given the ending, the beginning cash balances, the ending cash balance from December. And the beginning cash balance in February is the ending cash balance in January. And again, it just goes across like that.
And so this gives us our ending cash balance. And as long as we have a positive amount greater than our minimum cash balance, which is going to be this $22,000, we have a cash surplus. And this money can be invested to earn some return, since it's not being used in operations at this particular point. But eventually, we do get to the point where we have to borrow $55,000 in order to maintain our minimum cash balance because of the additional financing that we need right here, which is calculated right there. And what happens is the policy of this particular budget is to pay off the $55,000 as soon as possible for out of the cash flow that occurs. And so what you have, just to show you this -- that's the net monthly change and the beginning balance. And then, if we move over to here, you'll see this amount moves up here, and we're actually paying that amount off. And then, we continue with our cash balance.
So you can see the cash budget is a very useful tool for us to manage the working capital of the company, and make sure that we don't run out of cash -- to me things like inventory, payments, or accounts payable, and payroll.