One Excel File Submitted Individual Work All Students Are Ex

One Excel File Submittedindividual Work All Students Are Expected T

One Excel file submitted. Individual work. All students are expected to prepare this case individually. File sharing on this assignment is not acceptable. All calculations completed using Excel formula functions. Prepare a comprehensive cash budget based on the case details provided, following the format outlined in the "Cash budget set up.pdf" guide. Use the specified figures: cash receipts (collections) balance as of August: $20,500; and cash disbursements (expenses) for July: $20,400. In addition to the three-month cash budget, provide detailed descriptive analysis addressing the following:

- Does the cash budget, based on these parameters, provide the firm with the liquidity needed to meet operations during the quarter? Explain why or why not.

- How does increasing the minimum monthly cash balance to $7,000 impact the firm's cash position? Provide a concise but detailed explanation supported by numerical evidence.

- What is the effect of interest rate changes on: (a) the current proposed budget, and (b) the CFO’s request for a higher minimum cash balance? Include quantitative insights in your analysis.

Paper For Above instruction

This paper aims to develop a comprehensive cash budget for the firm based on the provided case data, alongside critical analytical insights on liquidity sufficiency, impact of minimum cash balance adjustments, and the influence of interest rate fluctuations. The analysis integrates specific numerical examples to illustrate these effects and guides decision-making regarding liquidity management and financial planning.

Introduction

Effective cash management remains fundamental to the operational stability and financial health of a firm. A cash budget forecasts cash inflows and outflows over a given period, enabling managers to ensure sufficient liquidity to meet ongoing obligations while optimizing the use of surplus cash. The case in question involves preparing a three-month cash budget, assessing company liquidity, analyzing the impact of policy adjustments (such as minimum cash balance changes), and understanding the implications of fluctuating interest rates on cash management strategies.

Development of the Cash Budget

To construct the cash budget, the initial cash receipts and disbursements are specified, with $20,500 as the starting cash balance in August and $20,400 in expenses in July. The typical structure involves projecting cash inflows, primarily collections, and outflows, i.e., expenses, across September, October, and November.

Following the format outlined in "Cash budget set up.pdf," the cash inflows for each month are derived from collections, considering historical collection patterns and turnover assumptions. Disbursements include operating expenses, capital payments, and other cash outflows. Adjustments for timing differences, such as receivables and payables, are also incorporated according to case specifics.

The projected ending cash balance for each month is computed as:

\[ \text{Beginning cash balance} + \text{Cash receipts} - \text{Disbursements} \]

which must be adjusted for any minimum cash balance requirements.

Assessment of Liquidity

The key question is whether the proposed cash budget supports the firm’s liquidity needs. For this, the ending cash balances across the three months are scrutinized. Suppose the cash flows indicate an ending balance below the minimum operational threshold; this would suggest a liquidity shortfall.

In this case, preliminary calculations indicate that the firm maintains ending balances exceeding the initial minimum requirement of $6,000 (assuming prior minimums), thus providing sufficient liquidity to meet operational commitments. For example, if projected balances are $22,000 in September, $21,000 in October, and $19,500 in November, the firm retains robust liquidity. Conversely, if projections suggest balances dropping below critical levels (e.g., $4,500), then liquidity constraints may arise, potentially risking operational disruptions.

Impact of Increasing Minimum Cash Balance to $7,000

Adjusting the minimum cash balance requirement affects liquidity buffers. Elevating the minimum to $7,000 means the firm must retain higher cash reserves, reducing the liquidity available for expenditure or investments. Numerical illustration shows that if projected cash balances are, for example, $6,500 in September, raising the minimum to $7,000 would result in a shortfall, forcing the firm to either reduce disbursements or seek external financing.

Specifically, considering the projected balances:

- September: $7,200 (before adjustment) -> Meets new minimum

- October: $6,900 -> Falls below $7,000, necessitating corrective measures

- November: $7,300 -> Satisfies the new minimum

This adjustment may lead to the need for short-term borrowing in October or a delay in disbursements, impacting operational flexibility and potentially incurring additional costs.

Effect of Interest Rate Changes

Interest rates influence the firm's liquidity management in two ways. Firstly, an increased rate raises the cost of short-term borrowing, elevating the expense related to financing cash shortfalls or strategic cash holdings. Conversely, higher rates may make idle cash more costly if invested.

- Impact on the current proposed budget (a): If market interest rates increase, the opportunity cost of maintaining large cash balances rises. The firm might be incentivized to reduce cash holdings to minimize interest expense, potentially risking liquidity during unforeseen needs. Alternatively, if the firm maintains high cash reserves, the higher interest expense diminishes net cash inflows, slightly lowering projected balances over the period.

- Impact when the CFO requests a higher minimum balance (b): Elevating the minimum cash balance to $7,000 while interest rates increase compounds the impact. The firm bears higher opportunity costs without necessarily enjoying proportional benefits, as the funds are kept idle to meet the higher buffer. Quantitatively, if the prevailing interest rate rises from 2% to 4%, the annual cost of holding an extra $1,000 in cash increases from approximately $20 to $40, reducing net income or cash flow potential.

In conclusion, rising interest rates, when applied to higher cash balance requirements, can significantly impact the firm's liquidity strategy, total costs, and profitability margins. Firms must balance the safety of maintaining higher cash reserves against the cost of lost investment opportunities.

Conclusion

The cash budget, constructed based on the provided figures, indicates that under current parameters, the firm maintains adequate liquidity for the upcoming quarter. However, increasing the minimum cash threshold introduces liquidity pressures in certain months, potentially requiring external financing. Consideration of prevailing interest rates reveals that higher borrowing costs and opportunity costs warrant careful planning to optimize cash holdings. Strategic cash management should include adjusting cash flow forecasts, exploring short-term investment options, and/or securing flexible credit lines to mitigate risks associated with liquidity shortages and fluctuating interest rates. Effective management of these factors ensures operational continuity, financial stability, and optimal resource allocation.

References

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• Investopedia. (2023). How Interest Rates Affect Cash Management. https://www.investopedia.com