Capital Budgeting Precision Machines Data November December

Capital Budgetingprecision Machinesdatanovemberdecemberjanuaryfebruar

Prepare a cash budget for January through June and determine the cash surplus, deficit, and the financing needs of the company. Write a 300-word essay recommending a cash management strategy for the company that will minimize the financing cost and increase the cash flows for the company. Explain two economic and market forces that will impact the financial plan of this company.

Paper For Above instruction

Precision Machines is a manufacturing company that is planning its financial operations over the upcoming six months, specifically from January through June. The company’s financial planning involves understanding cash inflows, such as sales collections, and cash outflows, including material purchases, wages, salaries, capital expenditures, and other expenses. The core goal is to develop a comprehensive cash budget that ensures sufficient liquidity to meet operational needs while minimizing the cost of financing.

The company’s sales data indicates that 30% of total sales are cash sales, while 70% are credit sales. Of the credit sales, 50% are received one month after the sale, and the remaining 50% are received two months post-sale. These patterns inform cash inflow projections, with collections distributed as 30% in the month of sale, 35% in the following month, and another 35% in the subsequent month. Material costs are 50% of sales, payable one month after the purchase, aligning raw material payments with the sales cycle, thus affecting cash outflows.

The cash budget calculation starts by projecting monthly revenues, subtracting projected expenses such as wages, salaries, capital costs, and other expenses, and factoring in debt costs like interest payments. A critical component involves maintaining a minimum cash balance of $5,000. Surpluses are used to pay down existing debt or saved for future investments, whereas deficits prompt borrowing at a 10% interest rate.

Based on the provided data, it becomes evident that the company needs a strategic approach to cash management. During months with expected surplus cash flows, the firm should prioritize paying off debt and financing growth initiatives. Conversely, in months of cash shortfalls, timely borrowing should be arranged, ensuring minimal interest expense by aligning borrowings closely with actual need, avoiding unnecessary overdrafts.

To optimize cash flows and limit financing costs, Precision Machines should implement a proactive cash management strategy centered on accurate forecasting and flexible borrowing arrangements. Establishing an automated cash flow forecasting system will improve accuracy, allowing the company to anticipate shortfalls and surpluses and respond accordingly.

The company should also consider diversifying its sources of short-term funding to reduce the cost of borrowing, such as negotiating lines of credit with financial institutions. Maintaining a buffer above the minimum cash balance will provide a safety net against unexpected expenses or delays in receivables, thereby reducing reliance on costly emergency borrowing.

Two key economic and market forces that influence this financial plan include fluctuation in interest rates and economic cycles. Rising interest rates increase the cost of borrowing, making it imperative for the company to reduce reliance on debt and enhance cash reserves during periods of economic expansion.

Similarly, an economic downturn can lead to decreased sales, delayed receivables, and increased credit risk, necessitating more conservative cash flow management and heightened liquidity buffers. Proactive adjustment to these market conditions is crucial for maintaining financial stability and minimizing financing costs in varying economic climates.

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