Prof Hayat's Firm Sales Guide

This Is For Prof Hayat To Work On A Firm With Sales Of 5000 Has T

This assignment involves preparing financial projections and cash flow analysis for a firm based on its current balance sheet, projected sales increase, and cash flow data. The tasks include calculating the impact of sales growth on assets and liabilities, determining the need for external financing, constructing a pro forma balance sheet, and preparing a detailed monthly cash budget considering collections, disbursements, and other financial obligations.

Paper For Above instruction

The financial management of a firm requires meticulous planning and forecasting, especially when anticipating sales growth and the resulting impact on assets, liabilities, and cash flows. This paper will systematically analyze a firm existing with a defined balance sheet and project its future financial positions based on an anticipated increase in sales from $5,000 to $5,500. Additionally, it will involve constructing a cash budget based on historical sales data and known disbursement patterns.

Projection of the Balance Sheet with Sales Increase

Initially, the firm’s current balance sheet exhibits total assets and liabilities of $4,600, with accounts receivable, inventory, and accounts payable as the primary components that vary directly with sales. The company's current sales of $5,000 generate an after-tax profit of 20%, equating to $1,000 (assuming taxes are implicitly accounted for or negligible in the initial calculation). As sales increase to $5,500, it is crucial to project how the asset and liability items will change accordingly, based on their spontaneous variability with sales, which we approximate using the percentage of sales technique.

Accounts receivable are reported at $1,300 for sales of $5,000. The ratio of accounts receivable to sales is 26% ($1,300 / $5,000). Thus, for projected sales of $5,500, accounts receivable would increase to $1,430 (26% of $5,500). Similarly, inventory is $1,600 for sales of $5,000, indicating an inventory-to-sales ratio of 32%. Applying this ratio to the new sales level yields an inventory requirement of $1,760.

Accounts payable are initially $1,200 for $5,000 sales, representing 24% of sales. With increased sales, accounts payable would adjust to $1,320 (24% of $5,500), assuming trade credit terms remain unchanged. These spontaneous increases reflect the proportional relationship between sales and these accounts, and such changes are straightforward to project using the given percentages.

Calculation of Additional Financing Needed

The firm’s profit at the new sales level can be calculated as 20% of $5,500, which is $1,100. The firm plans to distribute 75% of earnings, leaving 25% retained. Retained earnings for the period amount to approximately $275 ($1,100 x 25%). It is also important to consider the firm's initial equity and whether additional financing is necessary to support the expanded asset base, spanning accounts receivable, inventory, and possibly other current assets.

The change in spontaneous current assets (accounts receivable, inventory, and accounts payable) totals an increase of $130 in receivables, $160 in inventory, and $120 in payables. The net increase in spontaneous current assets (excluding payables) totals $170. The leftover cash flow after distributions and spontaneous asset increases determines whether external financing is necessary.

Next, the firm’s projected assets increase by the sum of the increased receivables and inventory ($290), less the increase in payables ($120), totaling a net increase of $170 in net working capital. Since retained earnings are only $275, and the spontaneous current asset increase amounts to $170, the new positive cash flow from operations helps fund the asset increase. However, if the total increase in assets exceeds retained earnings plus spontaneous liabilities, external financing (long-term debt) will be necessary to fill the gap.

Construction of Pro Forma Balance Sheet

Assuming the additional financing is obtained through long-term debt, the new long-term debt will be adjusted to reflect any shortfall after accounting for retained earnings. The initial long-term debt is $2,500, and with spontaneous liabilities increasing by $120, the new liabilities would increment accordingly. Given that the firm distributes most earnings, the retained earnings will contribute to funding the assets, and any necessary excess will be financed through long-term debt, which will further increase the debt balance.

In constructing the pro forma balance sheet, assets would include the initial assets plus the new receivables and inventory; liabilities would include the spontaneous accounts payable plus new long-term debt, adjusted according to the financing plan. The residual of assets after liabilities will be accounted for as equity, possibly adjusted for retained earnings and new debt.

Cash Budget Analysis

For the cash budget, the firm’s historical sales data and collections pattern must be utilized to forecast cash inflows. With 70% of sales on credit collected one month after the sale, collections for August, September, October, and November can be accurately projected. Particular attention is paid to significant disbursements such as variable expenses (60% of sales), fixed expenses ($10,000 monthly), tax payments ($80,000 in August), debt repayment ($400,000 in November), and beginning versus desired cash balances.

Starting with an initial cash balance of $50,000, the forecast would incorporate collections from prior months’ sales, disbursements, tax payments, debt repayment schedules, and other cash inflows or outflows. The goal is to maintain a minimum cash balance of $10,000, prompting the firm to consider short-term borrowing if projected cash flows fall below this threshold, or placing excess cash in short-term investments if cash surpluses occur.

Conclusion

Effective planning and accurate projection of assets, liabilities, and cash flows are vital for a firm's growth strategy. The calculations suggest that with a sales increase to $5,500, the firm will likely need additional financing—anticipated to be long-term debt—to support the increased spontaneous current assets. The construction of the pro forma balance sheet provides a detailed view of future financial position, while the cash budget ensures the firm’s liquidity needs are met prudently. Such comprehensive financial analysis enables management to make informed decisions that support sustainable growth and operational stability.

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