Cash Is King! Good Cash Management Is An Essential Jo 601551

Cash is King! Good cash management is an essential Jo

Prepare a cash flow summary and external financing summary based on the provided monthly net cash flows for the year. Determine whether the company needs outside financing, identify the minimum line of credit to request, and assess whether the company is a good candidate for this line of credit. Include your completed Excel template with all cash flows and your answers to the questions.

Paper For Above instruction

Effective cash management is crucial for the financial stability and operational success of small businesses, such as King Kars, an auto sales enterprise. Proper cash flow analysis allows business owners to anticipate periods of cash shortages or surpluses, enabling them to plan accordingly, whether through internal adjustments or external financing. The following comprehensive analysis will evaluate King Kars’ monthly cash flows, determine the necessity for external financing, and assess the company's suitability for obtaining a line of credit.

Cash Flow Summary

King Kars’ projected monthly net cash flows for the year are as follows: January: $5,000; February: -$30,000; March: $20,000; April: -$35,000; May: $25,000; June: -$10,000; July: $25,000; August: $25,000; September: -$30,000; October: $15,000; November: $15,000; December: $25,000. The business begins the year with a starting cash balance of $50,000, with a minimum desired cash reserve of $50,000 each month.

Analysis of Cash Flows and External Financing Need

Starting with a beginning cash balance of $50,000, the monthly cash balance can be projected cumulatively by adding net cash flows each month. In February, the projected cash balance decreases by $30,000, bringing it to $20,000—below the minimum desired cash level of $50,000. Similarly, in April and September, negative net cash flows of $35,000 and $30,000 respectively, reduce the cash balances significantly, potentially falling below the minimum cash requirement. To determine if external financing is needed, the cumulative cash position after each month must be assessed.

Calculating the month-by-month cash balances:

• January: Starting with $50,000 + $5,000 = $55,000 (above minimum)
• February: $55,000 - $30,000 = $25,000 (below minimum of $50,000)
• March: $25,000 + $20,000 = $45,000 (below minimum)
• April: $45,000 - $35,000 = $10,000 (below minimum)
• May: $10,000 + $25,000 = $35,000 (below minimum)
• June: $35,000 - $10,000 = $25,000 (below minimum)
• July: $25,000 + $25,000 = $50,000 (meets minimum)
• August: $50,000 + $25,000 = $75,000 (above minimum)
• September: $75,000 - $30,000 = $45,000 (below minimum)
• October: $45,000 + $15,000 = $60,000 (above minimum)
• November: $60,000 + $15,000 = $75,000 (above minimum)
• December: $75,000 + $25,000 = $100,000 (above minimum)

  From these calculations, it is evident that during February, March, April, May, June, and September, the cash balance falls below the minimum required of $50,000. To maintain the minimum cash reserve during these months, external financing will be necessary.

  Determining the Minimum Line of Credit

  To precisely identify the minimum line of credit, we examine the month when cash deficiency is the greatest. The lowest projected cash balance occurs in April at $10,000, which is $40,000 below the minimum reserve of $50,000. To cover this shortfall, King Kars requires at least a $40,000 line of credit. However, considering the monthly cash shortfalls in other months, the total need may be cumulative, but since the deficiencies occur at different times, a line of credit of approximately $40,000 to $45,000 would suffice to ensure the minimum reserve at all times.

  Candidate Suitability for the Line of Credit

  King Kars appears to be a suitable candidate for a line of credit, given its relatively stable cash inflows in several months and the ability to project its cash shortfalls. The company’s positive cash flows in many months—particularly July through December—indicate operational viability, and its starting cash balance provides a buffer for short-term liquidity needs during tough months. Moreover, the business owner’s consistent efforts to stock inventory during peak months suggest an understanding of cash flow patterns that can be effectively managed with external credit if needed.

  Conclusion

  In conclusion, based on the cash flow analysis, King Kars requires external financing amounting to approximately $40,000 to $45,000 to cover the most significant projected shortfalls. The business is a suitable candidate for this line of credit given its predictable cash flow patterns and strategic inventory management. Proper utilization of external financing can help ensure the business maintains its minimum cash reserves, avoids liquidity crises, and continues its operations smoothly.

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