Please Read The Relevant Parts Of Your Textbook Which 794566

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, as estimated below: 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 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 of $95,000 in June; Income tax payments estimated at $55,000 due in June and September; and miscellaneous costs around $10,000 monthly. Cash on hand on March 1 will be about $50,000, with a minimum cash balance of $50,000 to be maintained at all times.

Prepare a detailed monthly cash budget for Cyrus Brown Manufacturing from March through November using Excel, including all calculations, formulas, and assumptions. After completing the cash budget, analyze whether the company will need outside financing, determine the minimum line of credit required, evaluate the company's cash position during the period, and identify any financial concerns. Additionally, consider whether CBM would be a desirable client from a bank manager’s perspective and justify your assessment.

Paper For Above instruction

Developing a comprehensive cash budget is crucial for a manufacturing firm like Cyrus Brown Manufacturing (CBM) to ensure sufficient liquidity and financial stability. The purpose of this paper is to construct a detailed monthly cash budget based on provided sales forecasts, collection estimates, costs, and other financial obligations to evaluate CBM’s cash flow position and financing needs during the period from March to November.

The first step involves forecasting cash inflows, primarily derived from sales collections. With sales estimates for each month and collection percentages within the sale month, the following computations are made:

• Within the Month Collection: 25% of same month sales
• Next Month Collection: 55% of previous month sales
• Second Month Collection: 20% of the sales two months prior

For example, in March, sales of $100,000 yield a collection of $25,000 (25%). The subsequent collections in April include 55% of March sales ($55,000) and 25% of April sales ($68,750), with additional collections from May’s sales at 20%. These calculations establish a timeline of cash inflows each month.

Cash outflows primarily comprise manufacturing costs, administrative expenses, lease payments, taxes, and other miscellaneous costs. Manufacturing costs are incurred a month after the sales costs, meaning the costs associated with March’s sales are paid in April, and so forth. These costs are added as direct manufacturing expenses, aggregating to their respective monthly totals.

In addition to operating costs, large scheduled payments include a one-time plant investment in June ($95,000) and tax payments of $55,000 in June and September. Fixed expenses like salaries, rent, depreciation, and miscellaneous costs are steady monthly expenses, totaling $75,000 (salaries + rent + miscellaneous) plus depreciation, which is a non-cash expense.

To determine the cash balance for each month, the starting cash balance is combined with inflows and outflows. The initial cash on hand on March 1 is $50,000. It is crucial to maintain a minimum cash balance of $50,000, so any deficits identified indicate a need for external financing, such as a line of credit.

An analysis of the cash budget reveals insights about CBM's liquidity position:

• If projected cash balances fall below the minimum requirement, CBM will need external financing, the size of which can be determined by the cumulative shortfalls over the period.
• In particular, the month of June likely requires attention due to the large capital expenditure and tax payments, which may cause temporary cash shortages.
• During months where inflows exceed outflows, excess cash holdings could be used to offset deficits in other months or to build cash reserves.

Calculating the minimum line of credit involves summing the negative cash balances in each month to find the maximum external fund requirement. This proactive approach ensures that CBM can meet its obligations without liquidity constraints.

The cash position analysis suggests CBM's overall liquidity during the period is manageable but sensitive to the timing of large expenditures. The possibility of shortfalls in June, September, or other months indicates a need for careful planning and possibly securing a line of credit to buffer against cash flow variability.

From a banking perspective, CBM’s consistent sales growth, albeit with seasonal variances, stable operating expenses, and a manageable financing requirement might make it an acceptable client, provided proper collateral and risk assessment measures are in place. However, the large capital expenditure in June and subsequent tax obligations warrant cautious evaluation regarding repayment capacity and overall financial health.

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