Build A Model Input Data Collections During Month Of Sale 20

Build A Modelinput Datacollections During Month Of Sale201461 Assume

Build a Model Input Data Collections during month of sale 20% 1461: Assume constant; do not change. Collections during month after sale 60% 1461: This is a formula; do not change. Collections during second month after sale 25% 1461: For problem e; allow this to change to reflect slower collections. Lease payments $7,000. Target cash balance $30,000. General and administrative salaries $25,000. Depreciation charges $8,000. Income tax payments (Sep & Dec) $30,000. Miscellaneous expenses $5,000. New office suite payment (Oct) $95,000. Cash on hand July 1 $70,000. Sales, labor, and RM adjustment factor 0%.

a. Prepare a monthly cash budget for the last six months of the year.

May June July August September October November December January Original sales estimates $75,000 $115,000 $145,000 $125,000 $120,000 $95,000 $75,000 $55,000 $45,000. Original labor and raw material estimates $80,000 $75,000 $105,000 $85,000 $65,000 $70,000 $30,000 $35,000.

Forecasted Sales: Sales (gross) = Original sales estimate × (1 + sales adjustment factor). Collections: During month of sale 20%; during 1st month after sale 60%; during 2nd month after sale 25%. Payments for labor and raw materials are made during the month following the incurred costs. Monthly expenses include salaries, lease payments, depreciation, miscellaneous expenses, income tax payments, and specific scheduled payments like the office suite payment in October.

Construct the cash budget by calculating total collections based on sales forecasts, subtracting payments for labor/materials and operating expenses, and accounting for scheduled tax and lease payments. Track cash on hand starting July 1 at $70,000, ensuring a minimum balance of $30,000. Calculate net cash flows each month, cumulative cash flow, and determine if surpluses or shortages (loans) are needed.

b. Prepare an estimate of the required financing (or excess funds)—that is, the amount Marvel’s Renovations will need to borrow (or will have available to invest)—for each month during that period.

c. Conduct a sensitivity analysis: evaluate how late customer payments (slower collections) and a drop in sales impact the maximum loan requirements. Adjust collection percentages for the second month after sale and sales estimates accordingly, re-calculate the cash budget, and compare the maximum loan needed in each scenario.

Paper For Above instruction

Financial management within small and medium-sized enterprises (SMEs) requires meticulous planning and control over cash flows to ensure stability and solvency. Marvel’s Renovations, a custom building and repair company, exemplifies this through the preparation of a detailed cash budget for the last six months of 2020, integrating sales forecasts, collection patterns, operating costs, and scheduled payments. This paper develops a comprehensive cash budget and analysis, emphasizing the importance of accurate data modeling, sensitivity analysis, and strategic planning for optimal financial management.

The foundation of the cash budgeting process starts with accurate sales forecasts. For Marvel’s Renovations, the forecasted gross sales for each month from July to December 2020 are derived by applying the specified sales adjustment factor—assuming it remains at 0%—to the original sales estimates. Thus, the sales figures are used to estimate expected cash inflows, incorporating the percentage collection rates corresponding to different periods after sales: 20% during the sale month, 60% in the following month, and 25% in the second month after the sale. These collection percentages are based on historical collection patterns typical in the construction and renovation industry.

To construct the cash budget, each month’s total collections are calculated by aggregating the current month’s sales and the prior two months’ sales, multiplied by their respective collection percentages. For example, July collections include 20% of July sales, 60% of June sales, and 25% of May sales. This cumulative approach ensures the accuracy of cash inflow projections. Operating expenses, including labor, raw materials, salaries, lease payments, depreciation, miscellaneous expenses, and scheduled tax payments, are then deducted from the inflows to determine net cash flows. The payments for labor and raw materials are made in the month following incurrence, which necessitates careful tracking of prior month expenses.

The cash flow calculations also incorporate scheduled capital and operational expenditures such as the $95,000 payment for a new office suite in October and income tax payments due in August and December. Maintaining a target cash balance of $30,000 is integral to the financial plan; hence, any surplus cash beyond this amount is considered available for investment or debt repayment, while any deficit indicates the need for external financing. The cumulative cash position is updated each month by adding the net cash flow to the previous month’s balance, ensuring that the minimum cash reserve is maintained.

Results of the cash budget reveal the timing and magnitude of cash shortages, prompting the calculation of the maximum financing requirement. The analysis determines the peak loan amount needed across the months—highlighting periods where cash infusions are necessary to prevent cash shortages. These insights are critical for Marvel’s Renovations when seeking a line of credit or planning for cash surpluses.

The sensitivity analysis explores the impact of potential delays in customer payments and reductions in sales volume, which could compromise cash inflows. In scenarios where collections are slower, the percentage collected during the second month after sale is decreased, while adjustments to forecasted sales are made to reflect lower revenue. These modifications are incorporated into the cash budget, and the resulting maximum loan requirements are recalculated. Similarly, a drop in sales volume directly reduces cash inflows, altering the borrowing needs. Comparing these scenarios helps managers understand the robustness of their financial plans and prepares them for potential liquidity challenges.

In conclusion, effective cash management is fundamental for the operational continuity of Marvel’s Renovations. Developing detailed cash budgets, performing sensitivity analyses, and adjusting plans based on realistic assumptions enable the company to maintain liquidity, avoid insolvency, and capitalize on investment opportunities. This case demonstrates the importance of proactive financial planning in construction and renovation industries, where cash flows are highly cyclical and contingent on timely collections and payments.

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