Cash Is King! Good Cash Management Is An Essential Job

Cash Is King! Good Cash Management Is An Essential Jo

Cash is King! Good cash management is an essential job of the financial manager! You own a small auto sales business called King Kars. You stock up on inventory in February, April, June, and September. Your annual cash budget indicates that your MONTHLY NET CASH for the year will be the following: JAN $5,000 FEB -$30,000 MAR $20,000 APRIL -$35,000 MAY $25,000 JUNE -$10,000 JULY $25,000 AUG $25,000 SEPT -$30,000 OCT $15,000 NOV $15,000 DEC $25,000 You begin the year with a cash balance of $50,000, and the minimum cash balance desired must be $50,000 every month.

Prepare a cash flow summary and external financing summary as noted in the Excel spreadsheet assigned to this submission. Do you believe that the company needs outside financing? What is the minimum line of credit to request from a lender? Do you think you are a good candidate for the line of credit? Why?

Paper For Above instruction

Introduction

Effective cash management is a critical aspect of maintaining financial stability for small businesses, especially in industries like auto sales where cash flow fluctuations are common. This paper examines the cash flow management of King Kars, a small auto sales firm, based on its monthly net cash flows, and evaluates whether the company requires outside financing to sustain its operations. It also determines the minimum line of credit necessary and assesses the company's candidacy for such an external funding source.

Cash Flow Analysis

The cash flow analysis begins with the provided monthly net cash flows, which fluctuate significantly during the year. The company's starting cash balance is $50,000, with a minimum target balance also set at $50,000 each month. Calculating the cumulative cash position across the year shows the periods when cash deficits or surpluses occur :

  • January: Starting with $50,000, net cash inflow of $5,000 results in a cash balance of $55,000.
  • February: A net outflow of $30,000 reduces the cash balance to $25,000, below the desired minimum, indicating a need for external financing.
  • March: An inflow of $20,000 raises the balance to $45,000, still below the target.
  • April: Outflows of $35,000 result in a cash balance of $10,000, well below the minimum, necessitating additional financing.
  • May: An inflow of $25,000 brings the cash to $35,000.
  • June: A net outflow of $10,000 drops it to $25,000.
  • July: An inflow of $25,000 raises the cash to $50,000, meeting the minimum threshold.
  • August: A cash inflow of $25,000 results in $75,000, more than sufficient.
  • September: Outflows of $30,000 bring the balance down to $45,000.
  • October: An inflow of $15,000 increases the balance to $60,000.
  • November: An inflow of $15,000 raises the cash to $75,000.
  • December: An inflow of $25,000 results in $100,000, comfortably above the minimum cash level.

    From this analysis, the months of February, April, and September show cash balances falling below the desired minimum, indicating the company will need external financing during these periods to maintain the minimum cash balance of $50,000.

    External Financing and Line of Credit

    To determine the minimum line of credit needed, the maximum deficit during the required months must be noted. For February, the cash balance drops from $50,000 to $25,000, a deficit of $25,000. Similarly, in April, the cash balance falls to $10,000, representing a $40,000 shortfall below the target. September sees the balance at $45,000, which is adequate but close to the minimum.

    Therefore, the minimum line of credit should cover the largest shortfall, which is $40,000 during April. Requesting a line of credit of at least $40,000 would allow King Kars to cover the most significant cash deficits without risking operational disruption. This line of credit can be used strategically during months with projected cash shortfalls to ensure liquidity remains at or above $50,000.

    Assessment of Candidacy for the Line of Credit

    King Kars appears to be a suitable candidate for a line of credit given its predictable seasonal cash flows and positive overall cash position. The company starts the year with a healthy cash balance of $50,000, and its ability to generate positive net cash flows in most months suggests it maintains operational stability. However, its need to seek external financing during specific months indicates reliance on flexible borrowing options to manage cash flow gaps. Strengthening its cash management practices and maintaining a good credit history will further enhance its candidacy for a line of credit.

    Conclusion

    In conclusion, King Kars faces cash flow challenges during certain months that necessitate external financing. A line of credit of at least $40,000 is recommended to cover the maximum shortfall periods and ensure smooth operations. The company's overall positive cash flow and strategic planning make it a reasonable candidate for such financing, provided it manages its borrowing prudently. Effective cash flow management, combined with appropriate external financing, will enable King Kars to sustain its operations and capitalize on growth opportunities.

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