Good Cash Management Is An Essential Job Of Financial Manage

Good Cash Management Is An Essential Job Of The Financial Manager You

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

Effective cash management is crucial for the financial stability and growth of any business, including small enterprises like King Kars. Proper cash flow analysis and planning enable business owners and financial managers to meet operational needs, invest in growth opportunities, and avoid liquidity crises. This paper provides a detailed cash flow summary for King Kars, assesses the need for external financing, determines the minimum line of credit required, and evaluates the firm's suitability for such financing based on the provided cash budget data.

Cash Flow Summary

Initial cash balance is $50,000 at the beginning of January. 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. Assuming no other cash inflows or outflows, and that the minimum required cash balance remains at $50,000 each month, the cash position must be monitored closely to determine the need for external financing.

Calculating month-by-month, starting with an initial balance of $50,000:

  • January: $50,000 + $5,000 = $55,000 (above minimum, no financing needed)
  • February: $55,000 - $30,000 = $25,000 (below minimum of $50,000, need external financing of $25,000)
  • March: $25,000 + $20,000 = $45,000 (below minimum, need $5,000)
  • April: $45,000 - $35,000 = $10,000 (below minimum, need $40,000)
  • May: $10,000 + $25,000 = $35,000 (below minimum, need $15,000)
  • June: $35,000 - $10,000 = $25,000 (below minimum, need $25,000)
  • July: $25,000 + $25,000 = $50,000 (meets minimum, no financing needed)
  • August: $50,000 + $25,000 = $75,000 (above minimum)
  • September: $75,000 - $30,000 = $45,000 (below minimum, need $5,000)
  • 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)

External Financing Summary

The analysis indicates that King Kars needs external financing during February, March, April, May, June, and September when the cash balance dips below the $50,000 minimum. Summarizing the minimum required line of credit for each month:

  • February: $25,000
  • March: $5,000
  • April: $40,000
  • May: $15,000
  • June: $25,000
  • September: $5,000

The maximum of these needs determines the minimum line of credit necessary to sustain operations and meet the minimum cash balance requirements throughout the year. The highest amount needed at any point is during April, which requires a line of credit of $40,000.

Assessment of External Financing Need and Candidate Suitability

Given that the company experiences periods of negative net cash flows, external financing is essential to maintain liquidity and operational stability. The minimum line of credit of approximately $40,000 ensures that King Kars can cover the most significant shortfalls during the year. Securing such a line of credit would allow the business to manage cash flow fluctuations effectively, avoid potential disruptions, and capitalize on growth opportunities without risking insolvency.

As a small auto sales business, King Kars has demonstrated sufficient cash inflows during profitable months and maintained adequate cash reserves at the start of the year. The firm’s ability to generate positive cash flows in most months suggests it could be a good candidate for a line of credit, especially if it can demonstrate a solid credit history and robust sales performance. However, the business must also assess its capacity to service additional debt or credit obligations, considering possible interest costs and repayment terms.

In conclusion, prudent cash flow management and securing a line of credit aligned with the maximum short-term needs are vital for the financial health of King Kars. Such financing can provide a financial cushion, enabling the business to navigate periods of negative cash flow and continue growing sustainably.

References

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