Please Read The Relevant Parts Of Your Textbook Which Refer To Cash F
Please read the relevant parts of your textbook, which refer to cash flow and financial planning. To avoid any uncertainty regarding his business' financing needs at the time when such needs may arise, Cyrus Brown wants to develop a cash budget for his latest venture: Cyrus Brown Manufacturing (CBM). He has estimated the following sales forecast for CBM over the next 9 months: March $100,000 April $275,000 May $320,000 June $450,000 July $700,000 August $700,000 September $825,000 October $500,000 November $115,000
He has also gathered the following collection estimates regarding the forecast sales: Payment collection within the month of sale = 25% Payment collection the month following sales = 55% Payment collection the second month following sales = 20% Payments for direct manufacturing costs like raw materials and labor are made during the month that follows the one in which such costs have been incurred. These costs are estimated as follows: March $187,500 April $206,250 May $375,000 June $337,500 July $431,250 August $640,000 September $395,000 October $425,000
Additional financial information is as follows: Administrative salaries will approximately amount to $35,000 a month. Lease payments around $15,000 a month. Depreciation charges, $15,000 a month. A one-time new plant investment in the amount of $95,000 is expected to be incurred and paid in June. Income tax payments estimated to be around $55,000 will be due in both June and September.
And finally, miscellaneous costs are estimated to be around $10,000 a month. Cash on hand on March 1 will be around $50,000, and a minimum cash balance of $50,000 shall be on hand at all times. To receive full credit on this assignment, please show all work, including formulas and calculations used to arrive at the financial values. Group Project Guidelines As a group, prepare a monthly cash budget for Cyrus Brown Manufacturing for the 9-month period of March through November. Use Excel to prepare the monthly cash budget.
Based on your cash budget findings, answer the following questions: Will the company need any outside financing? What is the minimum line of credit that CBM will need? What do you think of CBM's cash position during the budget period? Do you see any concerns for the company in this regard? If you were a bank manager, would you want CBM as your client? Why or why not? It is up to the members of the group to divide the assignment tasks evenly. You will be graded on group participation Your submitted Group Project (150 points) must include the following: 75 Points. An Excel spreadsheet that contains your
group's monthly cash budget for Cyrus Brown Manufacturing. 75 Points. A double-spaced Word document of 1–2 pages that contains your answers to the questions listed in the Assignment Guidelines.
Paper For Above instruction
Developing an effective cash budget is essential for financial planning and ensuring sufficient liquidity for a business. Such planning allows business managers to anticipate potential cash shortages or surpluses, enabling proactive decision-making concerning financing, investments, and operational expenses. This paper examines the process of creating a cash budget for Cyrus Brown Manufacturing (CBM) over a nine-month period, applying revenue projections, collection estimates, expense analyses, and external financing considerations.
**Forecasting Sales and Cash Collections**
The initial step involves forecasting sales, which CBM estimates to vary from $100,000 in March to $825,000 in September, with fluctuating figures in the intervening months. These projections are crucial as they set the foundation for revenue inflows. The collection pattern, with 25% of sales collected in the same month, 55% in the following month, and 20% in the second following month, influences the timing and amount of cash inflows. For instance, in March, CBM expects to collect 25% of March sales ($25,000), whereas in April, it will collect 55% of March sales ($55,000) and 25% of April sales ($68,750), among others. Accurately calculating these collections ensures effective cash flow planning.
**Estimating Outflows and Expenses**
Direct manufacturing costs are incurred and paid in the month following the month in which they occur, with costs ranging from approximately $187,500 in March to $640,000 in August. Administrative salaries, lease payments, and miscellaneous expenses are assumed to be consistent each month, at $35,000, $15,000, and $10,000, respectively. Additionally, depreciation costs are non-cash and do not impact cash flow but are included for accounting purposes. A significant expenditure is the one-time investment in a new plant costing $95,000, scheduled for June, and income taxes of $55,000 are due in June and September.
**Constructing the Cash Budget**
To assemble the cash budget, one must compile all inflows and outflows month by month:
- **Beginning Cash Balance:** Starting with $50,000 on March 1.
- **Cash Inflows:** Sum of collections from sales, including the current month, the previous month, and two months prior, based on the collection percentages.
- **Cash Outflows:** Include direct manufacturing costs paid in the following month, operational expenses (salaries, leases, miscellaneous), tax payments, the plant investment in June, and any other scheduled expenditures.
- **Net Cash Flow:** Calculated as total inflows minus total outflows for each month.
- **Ending Cash Balance:** Determined by adding net cash flow to the beginning cash balance, ensuring it does not fall below the minimum required balance of $50,000. If it does, external financing may be necessary.
**Analytical Insights**
Creating the cash budget reveals whether CBM’s liquidity will be sufficient throughout the period. If projected ending cash balances fall below the minimum threshold, the company will require external financing, likely in the form of a line of credit. For example, if calculations indicate a cash shortage in certain months, CBM should arrange for appropriate credit beforehand.
The analyses also assess the cash position stability. Consistent surpluses indicate healthy liquidity, while persistent deficits suggest potential distress. For CBM, the substantial sales growth in September could strain cash resources, especially considering large expenses like taxes and the plant investment.
**Evaluation of CBM’s Financial Strategy**
From a banking perspective, a company’s ability to generate positive cash flows, meet liabilities promptly, and manage volatile expenses is critical. CBM’s projected cash needs, particularly in June and September, requiring $95,000 and $55,000 respectively, should be scrutinized. The company’s management must ensure they have adequate lines of credit to bridge any shortfalls, especially during months with large investments or tax payments.
If CBM maintains a healthy minimum cash reserve after these outflows, it demonstrates prudent liquidity management. However, if projections show consistent deficits, the risk of insolvency or the need for repeated borrowing increases, making the company a less attractive client from a bank’s standpoint.
**Conclusion**
Constructing a detailed cash budget provides a strategic view of CBM’s financial health over the upcoming months. It highlights periods where external financing might be necessary and guides managerial actions to optimize cash flow. For financial institutions, assessing the company’s projected liquidity and capacity to manage debt is key in decision-making. Proper planning, as demonstrated through this cash budget, can significantly reduce financial risks and support the sustainable growth of CBM.
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