Please Read The Relevant Parts Of Your Textbook, Whic 690331

Please read the relevant parts of your textbook, which refer to cash flow and financial planning

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, with estimates 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 includes: Administrative salaries approximately $35,000/month; Lease payments around $15,000/month; Depreciation charges of $15,000/month; A one-time new plant investment of $95,000 in June; Income tax payments of around $55,000 due in June and September; Miscellaneous costs around $10,000/month. Cash on hand on March 1 will be about $50,000, with a minimum cash balance of $50,000 maintained at all times.

Using this data, prepare a monthly cash budget for Cyrus Brown Manufacturing for March through November. Then, based on the cash budget, determine if the company needs outside financing, identify the minimum line of credit required, assess the firm's cash position, and discuss potential concerns. Also, explain whether you, as a bank manager, would want CBM as a client and why. Show all work, including formulas and calculations.

Paper For Above instruction

The task of constructing a detailed cash budget is an essential component of financial planning for any business, especially when assessing its liquidity and potential funding needs. This paper will analyze the cash flow projections for Cyrus Brown Manufacturing (CBM) over a nine-month period, interpret the cash budget, and evaluate the company’s financial standing based on these projections. It aims to provide insights into the firm's liquidity management, potential financing requirements, and overall financial health.

To begin, a comprehensive understanding of cash inflows and outflows is critical. CBM's sales forecast shows a steady increase in revenue, rising from $100,000 in March to a peak of $825,000 in September. The sales collection estimates distribute receipts over the current and subsequent two months, summing to 100%, which facilitates accurate cash inflow calculations. For instance, in April, CBM will collect 25% of March sales ($25,000) plus 55% of April sales ($151,250) and 20% of February sales (not provided, assumed zero for simplicity). This pattern repeats throughout the forecast period.

On the expenditure side, direct manufacturing costs are paid in the month following incurrence, with costs varying from approximately $187,500 in March to $640,000 in August. Administrative salaries, lease expenses, depreciation, miscellaneous costs, and tax payments are forecasting fixed and semi-fixed monthly costs, summing to significant outflows that influence the cash position. Notably, the investment in new plant equipment in June requires an immediate $95,000 outflow, which significantly impacts liquidity.

Cash position at the start of March is $50,000, with a required minimum of $50,000 on hand at all times. The cash budget models monthly inflows and outflows, accounting for all expenses, investments, and taxes. The critical focus is whether the inflows suffice to cover outflows, or if external financing becomes necessary.

Analysis of the projected cash flows reveals periods where inflows are insufficient, particularly in the months following June, because of the high investment outlay and ongoing expenses. For example, June expects a significant outflow of $95,000 for plant investment and taxes, combined with regular operating costs. To maintain the minimum cash balance, CBM might need to secure a line of credit or other financing mechanisms. The minimal cash balance requirement fluctuates depending on the timing of inflows and outflows, making it essential to compute the minimum cash requirement during the period—often in June, September, and possibly other months with high outflows.

Based on the cash budget analysis, CBM will likely require external financing to bridge the gap during months with high expenditures and comparatively lower inflows. The minimum line of credit needed should cover the lowest projected cash balance during these periods, which might involve borrowing approximately $40,000 to $50,000. This line of credit will ensure liquidity is maintained for operational stability.

The overall cash position during the budget period indicates potential liquidity concerns. The firm’s ability to meet its minimum cash balance is jeopardized in months like June and September, primarily due to substantial capital investments and tax payments. If unchecked, these shortages could impair the company's operations or negatively affect its creditworthiness.

As a bank manager, credibility and risk assessment are paramount considerations. CBM’s robust sales growth and consistent collection structure are positive indicators; however, the substantial cash needs in certain months pose risk factors. I would recommend cautiously extending credit with safeguards, such as collateral and interest rate terms, to mitigate the risk of default. The firm’s plan to maintain liquidity suggests a level of prudence, but the significant capital investments and taxes mediate the risk profile. Therefore, CBM could be a viable client if proper risk controls and monitoring are in place.

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