Build A Model Input Data Collection During Month Of Sale 201

Build A Modelinput Data Collections During Month Of Sale201461 Assume

Build a model input data collections during month of sale 20% 1461: Assume constant and do not change. Collections during month after sale 60% 1461: This is a formula and should not be changed. Collections during second month after sale 25% 1461: For problem e, allow this to change to reflect slower collections. Lease payments are $7,000. Target cash balance is $30,000. General and administrative salaries are $25,000. Depreciation charges are $8,000. Income tax payments are $30,000 (Sep & Dec). Miscellaneous expenses are $5,000. New office suite payment is $95,000 (Oct). Cash on hand July 1 is $70,000. Sales, labor, and RM adjustment factor is 0%. Prepare a monthly cash budget for the last six months of the year, from May to January, using the given sales and labor estimates, including collections, payments, net cash flows, and the required financing or excess funds. Adjust the collections and purchases based on the sales adjustment factor, and perform a sensitivity analysis to assess how late customer payments and sales decreases influence the maximum loan needed. Use formulas and assumptions as specified, ensuring collection percentages and payment timings are accurately modeled.

Paper For Above instruction

The purpose of this paper is to develop a comprehensive monthly cash budget for Marvel’s Renovations for the last six months of the year, from May through January, based on given sales forecasts, collection assumptions, expenses, and potential variability factors. The primary goal is to ensure the business maintains sufficient cash flow to meet its obligations, while also identifying any financing gaps that might require borrowing or excess funds that could be invested.

Introduction

Cash budgeting is an essential financial management tool that helps businesses forecast their cash inflows and outflows to ensure liquidity and avoid potential financial distress. For Marvel’s Renovations, the cash budget encompasses sales projections, collection policies, expense forecasts, and minimum target cash balances. It also incorporates assumptions regarding the collection percentages over three months post-sale, which significantly influence cash flow timing. Furthermore, the budget must reflect how variations in customer payment behaviors and sales levels can impact the financing needs of the business. This analysis emphasizes creating a detailed, month-by-month projection that captures these dynamics, allowing for better decision-making and financial planning.

Sales and Collection Process

The original sales forecast for each month is calculated as the baseline sales estimate multiplied by 1 plus the sales adjustment factor, which is zero in this case but can vary for sensitivity analysis. Collections during the month of sale are assumed to be 20%, with additional collections of 60% in the following month and 25% in the second subsequent month, summing to 105% to account for rounding and timing accuracy. These collections are modeled via formulas to ensure consistency and allow flexibility when adjusting collection percentages for sensitivity analysis. For example, if customer payments slow down, the collections percentages for subsequent months can be reduced accordingly, which will delay inflows and increase the loan requirement.

Expenses and Payments

Expenses such as lease payments, administrative salaries, depreciation, income tax payments, miscellaneous expenses, and office space payments are scheduled as fixed or variable based on the assumptions provided. For instance, lease payments are fixed at $7,000 monthly, while income tax payments occur biannually in September and December. Salaries of $25,000 are assumed constant, and the new office suite payment of $95,000 occurs in October. The model accounts for these scheduled payments, as well as variable expenses proportionate to sales, such as labor and raw materials, which are adjusted by the sales forecast adjustment factor.

Cash Budget Construction

The cash budget begins with the starting cash balance on July 1st of $70,000. Each month, total collections are computed based on prior sales and collection percentages. Payments are summed from scheduled fixed expenses and variable purchases. The net cash flow for each month is calculated as total collections minus total payments, updating the cumulative cash position. A target minimum cash balance of $30,000 is maintained; if the cash on hand falls below this target, the model computes the maximum loan needed to bridge the cash shortfall.

Sensitivity Analysis

To evaluate financial risks, the model performs sensitivity analysis under two scenarios: late customer payments and sales decline. The late payment scenario reduces collection percentages during subsequent months, delaying cash inflows and increasing borrowing needs. The sales decline scenario decreases forecasted sales, thus reducing collections and increasing the reliance on borrowed funds. Both scenarios are modeled by adjusting collection rates and sales estimates, and their impacts on the maximum loan requirement are quantified. These insights help the company plan for adverse conditions, establish contingency strategies, and optimize borrowing or investment decisions.

Results and Recommendations

The resulting cash budget identifies the months with potential cash shortfalls, indicating the need for external financing. Under the base case, the maximum loan requirement is calculated based on original assumptions. Sensitivity analysis reveals that delays in collections or drops in sales significantly increase the loan necessity, emphasizing the importance of managing customer payment behaviors and sales performance. To mitigate risks, Marvel’s Renovations may consider tightening credit policies, accelerating collection efforts, or maintaining a contingency reserve. Regular monitoring of actual cash flows against projections will allow timely adjustments, ensuring financial stability throughout the period.

Conclusion

Effective cash budgeting requires meticulous planning, incorporating assumptions about collections, expenses, and sales variability. By modeling different scenarios, Marvel’s Renovations can safeguard liquidity, meet its financial commitments, and optimize its borrowing strategy. The comprehensive approach outlined provides a robust framework for managing cash flow challenges and supports strategic financial decision-making amid uncertainties. Continuous analysis and adaptive strategies will be key to maintaining operational stability and achieving financial goals.

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