## Inventory and Purchase Budget - Part 3

Part 3  -  Determine When You Will Pay For Your Monthly Purchases

Payment on purchases will depend solely on the credit terms offered by your supplier's of product. Credit terms refer to the number of days (if any) suppliers allow a business to pay for goods or services. Many suppliers provide credit terms of 30 days, 90 days, or 120 days. Other suppliers will not provide credit to businesses, especially new ventures.

Lets assume, D&D Disk Copying Services (Murray's supplier) provides Murray with credit terms of 30 days. This means, Murray can wait 30 days before paying for the diskettes he purchases from his supplier. Therefore, if he purchases diskettes in July of 200X, he will not pay for them until August of 200X. Similarly, if he purchases diskettes in August of 200X, he will not have to pay for them until September of 200X, and so on ...

Below illustrates the number of diskettes Murray plans to purchase each month (calculated in Part 1 of this Budget above), the cost of the purchases each month (calculated in Part 2 of this Budget above), and WHEN payment will be made on the purchases (determined below).

 PAYMENT ON PURCHASESMADE DURING 200X: MONTH Number of Units to be Purchased Cost to Purchase each Unit Total Cost of Purchases each Month Payment on Purchases each Month July 1,548 \$3.00 \$4,644 \$ 0 August 956 \$3.00 \$2,868 \$4,644 September 564 \$3.00 \$1,692 \$2,868 October 412 \$3.00 \$1,236 \$1,692 November 472 \$3.00 \$1,416 \$1,236 December 912 \$3.00 \$2,736 \$1,416 TOTALS 4,864 \$14,592 \$11,856

As you can see, payment on purchases will lag one month, since the credit terms given by Murray's supplier are 30 days. If the supplier's credit terms were 60 days, payment would lag two months. If the supplier's credit terms were 90 days, payment would lag three months, and so on.

Notice, the cost of Murray's purchases in December, 200X, amount to \$2,736. Since the payment lags 30 days, Murray will not pay for these purchases until January, 200Y. This can be viewed in the following chart entitled "Payment for Purchases Made During 200Y".

 PAYMENT ON PURCHASESMADE DURING 200Y: MONTH Number of Units to be Purchased Cost to Purchase each Product Total Cost of Purchases each Month Payment on Purchases each Month January 888 \$3.30 \$2,930 \$2,736 February 736 \$3.30 \$2,429 \$2,930 March 720 \$3.30 \$2,376 \$2,429 April 576 \$3.30 \$1,901 \$2,376 May 416 \$3.30 \$1,373 \$1,901 June 328 \$3.30 \$1,082 \$1,373 July 680 \$3.30 \$2,244 \$1,082 August 648 \$3.30 \$2,138 \$2,244 September 424 \$3.30 \$1,399 \$2,138 October 832 \$3.30 \$2,746 \$1,399 November 808 \$3.30 \$2,666 \$2,746 December 1160 \$3.30 \$3,828 \$2,666 TOTALS 8,216 \$27,113 \$26,021

As you can see, payment on the purchases will also lag one month during 200Y. Moreover, Murray assumes his supplier will provide him with the same credit terms in 200Y as were offered in 200X (IE 30 days).

Notice, the cost of Murray's purchases in December, 200Y amount to \$3,828. Since payment lags 30 days, Murray will not pay for these purchases until January, 200Z.

Anticipated Payment on Purchases is extremely important when developing a Forecasted Cash Flow Statement. Furthermore, these payments will appear on Murray's 200X and 200Y Forecasted Cash Flow Statements as "Cash Outflows"; only in the month payment is due.

Categories: Forecasting