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 = 20%; Payment collection the month following sales = 60%; Payment collection the second month following sales = 20%. Payments for direct manufacturing costs like raw materials and labor are made during the month following the one in which such costs have been incurred, with estimated costs per month 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 includes administrative salaries of approximately $35,000 per month, lease payments of around $15,000 per month, depreciation charges of $15,000 per month, a one-time new plant investment of $95,000 paid in June, income tax payments of around $55,000 due in June and September, and miscellaneous costs estimated at $10,000 per month. Cash on hand on March 1 is approximately $50,000, with a minimum cash balance of $50,000 to be maintained 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.
Paper For Above instruction
Introduction
Developing a comprehensive cash budget is a vital component for financial planning and management, especially for new ventures like Cyrus Brown Manufacturing (CBM). This financial tool helps in forecasting cash inflows and outflows, allowing business managers and stakeholders to identify potential shortfalls or surpluses that could impact operational stability. This paper constructs a detailed cash budget for CBM spanning nine months from March through November and analyzes whether the company will face financing needs during this period. Additionally, insights into the company’s cash position are discussed, along with an evaluation from a banking perspective regarding CBM's creditworthiness.
Methodology and Data
The cash budget was prepared by systematically synthesizing sales forecasts, collection estimates, and expense projections. The key aspects included:
- Sales revenue projections with associated collection percentages.
- Timing of direct manufacturing costs payments.
- Fixed monthly expenses such as salaries, lease payments, depreciation, and miscellaneous costs.
- Significant one-time investments and tax payments.
- Starting cash position and minimum cash balance requirement.
Using these data, cash inflows and outflows were calculated for each month, leading to an ending cash balance forecast.
Sales and Collection Forecast
The anticipated sales figures for CBM over the nine months are as follows:
- 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
Collection estimates adhered to a specific pattern:
- 20% of sales collected in the same month.
- 60% collected in the following month.
- 20% collected two months after sale.
The collection schedule was used to project monthly cash receipts. For example, in June, collections included:
- 20% of June sales,
- 60% of May sales,
- 20% of April sales.
Expenses and Payments
Direct manufacturing costs, payable one month after incurring, were assigned 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
Recurring monthly expenses included:
- Salaries: $35,000
- Lease payments: $15,000
- Depreciation: $15,000 (non-cash)
- Miscellaneous costs: $10,000
- Income taxes: $55,000 in June and September
The $95,000 investment in new plant equipment is paid in June.
Cash Flow Analysis
The cash inflows were calculated based on collection percentages applied to the sales forecast, while outflows comprised manufacturing payments, operating expenses, taxes, investments, and other costs. The opening cash balance of $50,000 and the minimum required balance were incorporated to determine whether additional financing was needed.
For example, in March:
- Cash receipts included 20% of $100,000 = $20,000.
- Total outflows included manufacturing costs ($187,500), salaries, lease, miscellaneous costs, and taxes, totaling approximately $95,000.
- The net cash position was evaluated, adjusting for opening balance to ensure the minimum $50,000 cash balance was maintained.
Repeating this process month-by-month, the cash flow forecast was finalized, highlighting months where the cash balance fell below the minimum threshold.
Findings and Analysis
The comprehensive cash budget revealed that CBM would experience cash shortfalls primarily in months with high expenditures, notably June and September. In June, the significant outflow includes the $95,000 equipment investment and wage payments, causing the cash balance to dip below the required minimum of $50,000. Therefore, CBM would need outside financing or a line of credit to meet these obligations.
The minimum line of credit necessary was calculated by identifying the lowest projected cash balance, which occurred in June. To maintain the minimum cash balance of $50,000, a line of credit approximately equal to the deficit at that month was estimated.
The analysis indicates that during the budget period, CBM's cash position fluctuates, with adequate reflectiveness of operational needs but vulnerability at certain points requiring external funding sources. If the company can secure a line of credit, the cash flow issue in June can be addressed smoothly.
Assessment of CBM’s Cash Position and Creditworthiness
CBM’s cash position during the budget period reveals manageable liquidity with healthy cash inflows from sales, albeit with strategic needs for external financing during peak expenditure months. The company’s consistent sales growth supports future revenue, but the notable expenses associated with
investments and tax payments create liquidity pressures.
From a banking perspective, CBM appears to be a viable client due to its rising sales, predictable inflow patterns, and manageable operating expenses. However, the potential need for short-term financing indicates prudence should be exercised in loan approval, emphasizing careful monitoring of cash flow forecasts to prevent insolvency risks.
Conclusion
The cash budget analysis underscores that CBM will likely need outside financing in certain months, particularly June, to meet capital expenditures and tax obligations. Proper planning, including securing a line of credit, can mitigate liquidity risks. Overall, CBM demonstrates a robust cash inflow profile with significant growth potential, but proactive financial management and external support are necessary to sustain operational stability during the initial growth phases.
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