Cash Is King: Good Cash Management Is An Essential Job Of Th

Cash Is Kinggood Cash Management Is An Essential Job Of The Financial

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? Please submit the Excel template below, saved under your name, with the columns and rows completed with the cash flows. Also in this template, you must include the answers to questions 2 and 3 in the assignment. Click here to download the template. The use of 1 scholarly source (e.g., textbook, article from the CEC Library) is required.

Paper For Above instruction

Cash Is Kinggood Cash Management Is An Essential Job Of The Financial

The effective management of cash flow is fundamental to the financial health of small businesses, particularly those with fluctuating income and expenses such as King Kars. With a clear understanding of monthly cash inflows and outflows, a business owner can determine whether external financing is necessary to sustain operations and meet cash minimum requirements. This paper evaluates the cash flow scenario of King Kars, analyzes the potential need for external financing, estimates the minimum credit line required, and assesses the suitability of seeking such credit.

Cash Flow Analysis

The cash flow for King Kars varies substantially throughout the year, with some months experiencing negative net cash flows. The initial cash balance at the beginning of the year is $50,000, and the company aims to maintain a minimum cash balance of $50,000 each month. The monthly net cash flows 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

Calculating the cumulative cash position over the months reveals that months with significant negative cash flows require external financing to compensate for cash shortfalls and to ensure the minimum balance. For instance, in February, there is a net cash deficit of $30,000; given the starting balance of $50,000, the cash after February operations would be $50,000 + $5,000 (January) - $30,000 = $25,000, which is below the minimum required $50,000. This shortfall indicates a need for external financing.

External Financing Need and Minimum Line of Credit

Analyzing the cash flow statement indicates that the months of February, April, June, and September generate negative net cash flows. To determine the total external financing needed, we examine these months' deficits while considering the starting cash balance and the monthly cash flows. The minimum line of credit necessary at the beginning of the year is $30,000, primarily to cover the February deficit, which is the largest shortfall relative to the initial cash balance.

Specifically, in February, after accounting for the $5,000 January inflow, the cash position would be:

$50,000 + $5,000 (January) = $55,000 before February outflows. The February negative cash flow of $30,000 would reduce this to $25,000, below the minimum threshold. To maintain the minimum cash balance of $50,000 throughout, the company should secure a line of credit of at least $30,000 to cover the February shortfall and subsequent months with negative cash flows, adjusting as necessary for each month's actual inflow and outflows.

Evaluating the Suitability for a Line of Credit

King Kars appears to be a good candidate for a line of credit because of its predictable seasonal fluctuations in cash flows and the necessity to sustain operations during months of negative cash flow. The company's ability to generate positive net cash flows in most months suggests operational stability and potential for repayment of borrowed funds. Furthermore, maintaining a minimum cash balance emphasizes disciplined cash management, which bodes well for demonstrating creditworthiness to lenders.

However, the company must prepare detailed financial statements, demonstrate consistent revenue generation, and establish a repayment plan for borrowed funds. Proper documentation and a history of steady cash flow enhance the likelihood of securing a line of credit at favorable terms.

Conclusion

In conclusion, King Kars requires external financing primarily in months with projected negative cash flows, especially February, April, June, and September. The minimum line of credit needed to ensure liquidity and meet cash reserve requirements is approximately $30,000. Given the company's capacity to generate positive cash flows most months and the strategic importance of maintaining liquidity, King Kars appears to be a suitable candidate for a line of credit. Effective cash management and prudent borrowing are essential for sustaining operations and supporting growth.

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