Prepare A Monthly Cash Budget For The Last Six Months

Prepare a monthly cash budget for the last six months of the year

Prepare a monthly cash budget for the last six months of the year based on the given sales, labor, raw materials, collection, and payment data. Incorporate the assumptions about collection percentages during the month of sale, the month after sale, and the second month after sale. Consider the fixed expenses such as lease payments, salaries, depreciation, tax payments, miscellaneous expenses, and special payments like the new office suite. Begin with a cash on hand of $70,000 as of July 1. Forecast sales and related labor and raw materials costs, and determine the cash collections each month based on the collection percentages. Calculate the payments for labor and raw materials based on the previous month's costs. Include the other expenses for each month, and compute the net cash flow. From this, determine the ending cash balance each month, compare it with the target cash balance of $30,000, and identify any surplus cash or borrowing needs. Generate a detailed cash budget for August through January, including all inflows, outflows, and ending cash balances.

Paper For Above instruction

The preparation of a comprehensive cash budget is a critical financial planning tool that helps manage a company's liquidity by projecting cash inflows and outflows over a specified period. For Marvel’s Renovations, developing a six-month cash budget from August through January involves integrating various components, including sales and expense estimates, collection patterns, and payment schedules, to ensure adequate cash flow management and identify potential borrowing needs.

Establishing the Baseline Data

The starting point involves analyzing historical sales figures and associated costs, adjusting them based on sales forecasts and collection percentages. The provided data indicates sales and labor/raw material estimates from May 2020 through January 2021, which serve as the basis for calculations. Notably, sales estimates for each month are to be adjusted with a sales adjustment factor (initially presumed to be 0%). Labor and raw materials costs are similarly adjusted, assuming they move proportionally with sales.

Forecasting Sales and Costs

For each forecast month, sales are projected by multiplying the original estimates by (1 + sales adjustment factor). Given that the adjustment factor is initially set at 0%, the forecasted sales are based directly on the original estimates, but adjustments can be modeled in sensitivity analyses later. Labor and raw materials costs are adjusted similarly. These costs are recognized as incurred in the month following their estimation, as payments are made based on the previous month's costs.

Determining Cash Collections

Cash inflows from sales are distributed across three periods: during the month of sale (20%), in the month following sale (60%), and in the second month after sale (25%). Adjustments to these percentages are allowed if collection behavior slows, directly affecting the cash inflow timing. For each month, collections are calculated by applying these percentages to the sales made in the current and previous months, summing to the total cash received in that month.

Calculating Outflows

Cash payments include payments for labor and raw materials, calculated based on the previous month's costs, as these are the expenses incurred. Fixed costs such as lease payments ($7,000 monthly), salaries ($25,000), depreciation ($8,000), miscellaneous expenses ($5,000), and specific expenses like the new office suite payment ($95,000 in October) are incorporated. Income tax payments are scheduled for September and December, each amounting to $30,000. Payments for various expenses are summed to determine total outflows for each month.

Cash Flow Analysis

Net cash flow each month is computed as total cash inflows minus total outflows. The ending cash balance for each month is derived by adding the net cash flow to the beginning cash balance (initially $70,000 in July). After accounting for fixed target balances of $30,000, surplus cash or borrowing requirements are identified by comparing the ending balances with this target. Any shortfall indicates the need for borrowing, whereas surplus indicates excess liquidity.

Sensitivity Analysis

To accommodate potential delays in collections or drops in sales, sensitivity analyses are performed. These models adjust the collection percentages during the second month after sale or decrease sales estimates to evaluate their effects on the maximum borrowing need. Such scenarios help in contingency planning, ensuring the company maintains sufficient liquidity despite adverse conditions.

Results and Implications

The financial projections enable Marvel’s Renovations to proactively manage cash requirements, plan for potential financing, and ensure operational stability. By understanding peak borrowing months and the impact of collection delays or sales downturns, management can establish more resilient cash management strategies. Additionally, this budget guides decision-making regarding liquidity reserves and investment opportunities.

Conclusion

Developing a detailed cash budget is fundamental for effective financial management, especially for a renovation firm sensitive to project-based cash flows and collection patterns. By combining sales forecasts, collection schedules, fixed expenses, and sensitivity analyses, Marvel’s Renovations can anticipate its cash needs accurately, mitigate liquidity risks, and underpin its strategic financial planning.

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