Precision Machines Part 2: Note There Are Two Parts To This

Precision Machines Part 2notethere Are Two Parts To This Learning Tea

Precision Machines Part 2notethere Are Two Parts To This Learning Tea

Precision Machines Part 2 Note: There are two parts to this learning team assignment; Part 1 was completed in Week 3. Review the "Precision Machines" document and spreadsheet. Prepare a cash budget for Precision Machines in Microsoft ® Excel ® . Recommend a cash management strategy for the company that will minimize the financing cost and increase the cash flows for the company. Identify two economic and market forces that may impact the financial plan for this company.

Insert the requested information in the space provided in the spreadsheet. Click the Assignment Files tab to submit your Microsoft ® Excel ® document. 0 Plagiarism 100% Original On Time no more late than 7 pm for tomorrow April 26, 2016. Precision Machines Read the following case study: Precision Machines is preparing a financial plan for the next six months to determine the financial needs of the company. The historical analysis of the company’s sales shows that the company’s total sales are 30% cash sales and 70% credit sales.

Further analysis of credit sales shows that the company receives 50% of the credit sales one month after the sale and the remaining 50% in the second month after the sale. This means the cash collections from sales are 30% in the first month of the sale, 35% in the second month, and 35% in the third month. The materials purchased by the company amounts to 50% of the sales for the month. The company pays for the purchases one month after the initial purchase. The company likes to maintain a cash balance of $5,000.

The cost of borrowing is 10%. The company plans to pay off the loan whenever there is a surplus and borrow when there is a deficit. The attached spreadsheet shows revenues (sales), expenses, capital expenditures, and other expenses for Precision Machines’ next six months. Using the information given above and contained in the spreadsheet, prepare a cash budget for January through June and determine the cash surplus, deficit, and the financing needs of the company. In the Recommendations section of the spreadsheet, insert your recommendation of a cash management strategy for the company that will minimize the financing cost and increase the cash flows for the company. Additionally, identify two economic and market forces that may impact the financial plan for this company.

Paper For Above instruction

The financial health and sustainability of manufacturing companies such as Precision Machines critically depend on effective cash management strategies. Given the detailed sales and expense data, along with sales and purchase timelines, creating a precise cash budget is essential for maintaining optimal liquidity and minimizing financing costs. This paper evaluates the process of developing a cash budget for Precision Machines, explores strategic financial recommendations to optimize cash flows, and examines economic factors influencing the company’s financial planning.

Introduction

Cash management is a vital component for manufacturing firms that aim to balance liquidity and operational efficiency. For Precision Machines, an understanding of sales patterns, collection cycles, and payment obligations enables the formulation of a comprehensive cash budget. Such a budget not only informs the company's financing needs but also guides strategic decisions concerning borrowing and repayment to optimize cash flows while minimizing costs.

Developing the Cash Budget

The foundation of an effective cash budget for Precision Machines hinges on detailed sales analysis. The company’s sales data indicate that 30% are paid in cash immediately, while 70% are credit sales collected over subsequent months. Specifically, cash collections from credit sales occur at a rate of 50% in the first month after the sale, and the remaining 50% in the second month. This pattern results in a flow of cash that must be projected for each month, considering both immediate receipts and delayed collections.

The purchases of raw materials, amounting to 50% of the monthly sales, are paid one month after the purchase is made. This payment timing influences the company’s cash outflows. To maintain sufficient liquidity, the company plans to keep a minimum cash balance of $5,000, which affects borrowing and repayment decisions.

Given the data in the spreadsheet concerning revenues, expenses, and capital expenditures over a six-month period, the cash budget calculation involves summing cash inflows from sales, deducting cash outflows for expenses, and adjusting for financing activities. Any surplus funds are used to pay down existing loans or invested, while deficits are financed through borrowing at a 10% interest rate. This cycle supports maintaining a stable cash reserve and minimizing interest costs.

Financial Strategy Recommendations

To minimize financing costs and increase cash flows, Precision Machines should consider adopting a proactive cash management strategy. First, accelerating collection efforts for credit sales can immediately improve liquidity, perhaps by offering discounts for early payments or incentivizing quicker receipts. This enables the company to reduce borrowing needs and associated interest expenses.

Second, negotiating extended payment terms with suppliers can delay Outflows without adverse effects, aligning more closely with the company’s cash inflows. Establishing a favorable credit period with suppliers or bulk purchasing discounts can decrease cash outflows early in the cycle, thus improving cash flow timing.

Additionally, utilizing a cash concentration account consolidates funds from various sources, allowing for better visibility and control. Maintaining a rolling cash forecast helps anticipate surpluses and deficits, enabling dynamic adjustment of borrowing and repayment schedules. Such strategies collectively lead to reduced interest expenses and enhanced liquidity management.

Economic and Market Forces Impacting Financial Planning

Economic and market conditions significantly influence the financial strategies of manufacturing firms like Precision Machines. First, fluctuations in interest rates, such as the current 10% cost of borrowing, directly impact the company’s financing costs. Rising interest rates increase borrowing expenses, prompting the need for more cautious cash flow forecasts and conservative leverage strategies (Chen & Lee, 2022).

Second, changes in raw material prices due to market volatility or supply chain disruptions can substantially affect the company’s cost structure. An increase in material prices raises expenses, reducing profit margins unless offset by efficiency improvements or pricing strategies (Johnson, 2021). These external market forces require flexible financial planning and contingency reserves to navigate potential disruptions effectively.

Conclusion

Accurate cash budgeting for Precision Machines depends on detailed understanding of sales, collections, and payment timelines. Strategic recommendations such as accelerating receivables, extending payables, and utilizing cash concentration methods can substantially decrease financing costs and enhance cash flow stability. External economic forces, notably interest rate fluctuations and raw material price volatility, must be monitored continuously to adapt financial strategies proactively. An integrated approach to cash management ensures that Precision Machines remains financially resilient and competitive in a dynamic market environment.

References

• Chen, Y., & Lee, S. (2022). The Impact of Interest Rate Fluctuations on Corporate Financial Planning. Journal of Financial Management, 45(3), 154-168.
• Johnson, A. (2021). Supply Chain Volatility and Manufacturing Cost Management. International Journal of Production Economics, 236, 108-122.
• McKinsey & Company. (2020). Cash Flow Management in Manufacturing: Strategies and Best Practices. Retrieved from https://www.mckinsey.com
• Ross, S. A., Westerfield, R. W., & Jaffe, J. (2019). Corporate Finance (12th ed.). McGraw-Hill Education.
• Graham, J. R., & Harvey, C. R. (2001). The Effect of Managerial Incentives on Corporate Investment. Harvard Business School Working Paper.
• Fabozzi, F. J., & Drake, P. P. (2009). Financial Management and Analysis. John Wiley & Sons.
• Bloomberg. (2022). Market Trends Impacting Manufacturing. Retrieved from https://www.bloomberg.com
• Financial Times. (2023). Raw Material Price Trends and Economic Impacts. Retrieved from https://www.ft.com
• Investopedia. (2021). Understanding Cash Budgeting and Forecasting. Retrieved from https://www.investopedia.com
• United Nations Conference on Trade and Development. (2020). External Market Forces and Supply Chain Disruptions. UNCTAD Report.