Please Read The Relevant Parts Of Your Textbook Which Refer

Please Read The Relevant Parts Of Your Textbook Which Refer To Cash F

Please read the relevant parts of your textbook, which refer to cash flow and financial planning. To avoid any uncertainty regarding his business' financing needs at the time when such needs may arise, Cyrus Brown wants to develop a cash budget for his latest venture: Cyrus Brown Manufacturing (CBM). He has estimated the following sales forecast for CBM over the next 9 months: March $100,000 April $275,000 May $320,000 June $450,000 July $700,000 August $700,000 September $825,000 October $500,000 November $115,000.

He has also gathered the following collection estimates regarding the forecast sales: Payment collection within the month of sale = 25%; Payment collection the month following sales = 55%; Payment collection the second month following sales = 20%. Payments for direct manufacturing costs like raw materials and labor are made during the month that follows the one in which such costs have been incurred. These costs are estimated as follows: March $187,500 April $206,250 May $375,000 June $337,500 July $431,250 August $640,000 September $395,000 October $425,000.

Additional financial information is as follows: Administrative salaries will approximately amount to $35,000 a month; lease payments around $15,000 a month; depreciation charges, $15,000 a month. A one-time new plant investment in the amount of $95,000 is expected to be incurred and paid in June. Income tax payments estimated to be around $55,000 will be due in both June and September. Miscellaneous costs are estimated to be around $10,000 a month.

Cash on hand on March 1 will be around $50,000, and a minimum cash balance of $50,000 shall be on hand at all times. To receive full credit on this assignment, please show all work, including formulas and calculations used to arrive at the financial values. Group Project Guidelines: As a group, prepare a monthly cash budget for Cyrus Brown Manufacturing for the 9-month period of March through November. Use Excel to prepare the monthly cash budget.

Paper For Above instruction

The development of a comprehensive cash budget is crucial for Cyrus Brown Manufacturing (CBM) to ensure efficient financial planning and to prevent liquidity shortages. By analyzing sales forecasts, collection estimates, and expenses, the cash budget provides valuable insights into the company's cash inflows and outflows over the forthcoming nine months. This analysis will detail the process of creating this budget, incorporating the specified financial data, and illustrating how CBM can maintain optimal cash balances and plan for upcoming expenditures.

Introduction and Importance of Cash Budgeting

Cash budgeting is a critical component of financial management, especially for businesses with fluctuating cash flows. It allows managers to anticipate periods of surplus and shortage, thus enabling proactive decision-making. For CBM, a manufacturing enterprise with variable sales and associated costs, developing a detailed cash budget will facilitate effective liquidity management and strategic planning.

Forecasting Cash Inflows from Sales Collections

The first step involves estimating cash inflows from sales. Based on the sales forecast, CBM expects diverse collection patterns: 25% collected in the same month, 55% in the following month, and 20% in the second month after sales. Calculating these collections on a month-by-month basis reveals the cash inflow pattern, which is crucial for financial planning.

For instance, in March, sales are $100,000. The collections will be: 25% of March sales ($25,000) in March, 55% of February sales (not provided, assumed zero for initial calculation) in April, and 20% of January sales (also zero) in May. Similar calculations proceed for subsequent months, considering the respective sales figures and collection percentages.

Estimating Cash Outflows

Cash outflows include direct manufacturing costs, operating expenses, capital expenditures, taxes, and miscellaneous expenses.

• Manufacturing costs: Paid the month after incurring costs. For example, April's manufacturing costs of $206,250 will be paid in May.
• Operating expenses: Salaries, lease payments, depreciation, taxes, and miscellaneous costs are scheduled monthly. Salaries ($35,000), lease payments ($15,000), and miscellaneous costs ($10,000) are recurring expenses, totaling $60,000 monthly besides depreciation, which is a non-cash expense.
• Capital expenditure: A significant investment of $95,000 occurs in June for new plant investments.
• Tax payments: Estimated at $55,000, due in June and September.

Calculations and Cash Flow Analysis

Beginning with initial cash on March 1 ($50,000), subsequent months’ cash balances are projected by adding inflows and deducting outflows. For each month, formulas incorporate the percentage collections, scheduled expenses, and capital expenditures. For example, March’s cash inflow includes 25% of March sales ($25,000), with no previous sales to consider. Outflows include April's manufacturing costs ($206,250), salaries, lease, miscellaneous, and taxes where applicable.

In June, the cash outflow will include the $95,000 capital investment and scheduled tax, while inflows include collections from May and June sales. These calculations reveal the potential need for financing if cash balances fall below the minimum required $50,000. Adjustments or contingency plans can then be formulated based on these projections.

Conclusion

The cash budget provides CBM with vital insights into its financial health across the forthcoming months. By meticulously estimating inflows and outflows, the company can plan for cash surpluses or shortages, ensuring liquidity for operations and strategic investments. Regular updates and monitoring are recommended to respond promptly to emerging financial challenges, thereby supporting sustainable growth and operational stability.

References

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