Start With The Partial Model In The Attached File

Start With The Partial Model In The File Attached Marvel Pence Ceo O

Start with the partial model in the file attached. Marvel Pence, CEO of Marvel’s Renovations, a custom building and repair company, is preparing documentation for a line of credit request from his commercial banker. Among the required documents is a detailed sales forecast for parts of 2020 and 2021: Estimates obtained from the credit and collection department are as follows: collections within the month of sale, 20%; collections during the month following the sale, 60%; collections the second month following the sale, 25%. Payments for labor and raw materials are typically made during the month following the one in which these costs were incurred. Total costs for labor and raw materials are estimated for each month as shown in the table. General and administrative salaries will amount to approximately $25,000 a month; lease payments under long-term lease contracts will be $7,000 a month; depreciation charges will be $8,000 a month; miscellaneous expenses will be $5,000 a month; income tax payments of $30,000 will be due in both August and December; and a progress payment of $95,000 on a new office suite must be paid in October. Cash on hand on July 1 will amount to $70,000, and a minimum cash balance of $30,000 will be maintained throughout the cash budget period. a. Prepare a monthly cash budget for the last 6 months of 2020. b. Prepare an estimate of the required financing (or excess funds)—that is, the amount of money Marvel’s Renovations will need to borrow (or will have available to invest)—for each month during that period. c. If its customers began to pay late, this would slow down collections and thus increase the required loan amount. Also, if sales dropped off, this would have an effect on the required loan amount. Perform a sensitivity analysis that shows the effects of these two factors on the maximum loan requirement. Submit your answers in a Word document.

Paper For Above instruction

Introduction

Marvel’s Renovations, led by CEO Marvel Pence, requires a comprehensive financial plan to secure a line of credit from their commercial banker. Central to this process is constructing an accurate cash budget that reflects the company’s operational and capital expenses for the last six months of 2020. The purpose of this paper is to develop such a cash budget, estimate the necessary financing, and analyze the impact of delayed collections and declining sales on the company’s borrowing requirements through sensitivity analysis.

Sales Forecast and Collection Estimates

A critical component of the cash budget is the sales forecast, which impacts cash inflows. Marvel’s credit and collection department estimates that 20% of sales are collected in the month of sale, 60% in the following month, and 25% in the second month after the sale. These percentages determine the timing and amount of cash inflows for each period, influencing liquidity planning.

Given these collection patterns, the company can project monthly cash collections based on the forecasted sales figures. Accurate forecasting requires historical data, but for the purposes of this exercise, the estimations are assumed to follow consistent trends across the months analyzed.

Operational Expenses and Payments

On the expense side, Marvel’s Renovations incurs regular and predictable costs:

- Labor and raw materials costs are paid during the month following incurrence.

- Fixed monthly expenses include salaries ($25,000), lease payments ($7,000), depreciation ($8,000), and miscellaneous expenses ($5,000).

- Additional payments include income taxes of $30,000 due in August and December.

- A significant capital expenditure involves a $95,000 payment for a new office suite in October.

These inputs facilitate the construction of a monthly cash disbursement schedule, essential for assessing liquidity needs.

Cash Budget Construction

The cash budget starts with the opening cash balance of $70,000 on July 1 and maintains a minimum cash balance of $30,000. For each month, projected cash inflows from collections are added, and outflows from operational expenses, tax payments, and capital expenditures are deducted. The difference indicates whether the company has surplus funds or requires additional financing.

An illustrative example: August’s cash inflows include 20% of July sales, 60% of August sales, and 25% of June sales. Outflows comprise expenses paid in July and August, tax payments, and scheduled capital payments in October. This iterative process continues for each month.

Estimating Financing Needs

After calculating the net cash flows, the company compares the ending cash balance against the minimum required of $30,000. Shortfalls indicate the need for borrowing, while surpluses could be invested or used to reduce borrowing. The financing estimate thus identifies the average or peak borrowing requirement for each month.

Sensitivity Analysis of Delayed Payments and Sales Drop

To evaluate risk, the model incorporates scenarios where collections are delayed due to late customer payments. This would decrease cash inflows, increasing borrowing needs. Similarly, a decline in sales would reduce collections and thereby heighten the cash shortfall.

The sensitivity analysis models these factors by adjusting collection percentages and sales estimates upward or downward, observing their impact on the maximum required loan amount. These projections aid in financial planning by highlighting vulnerabilities and necessary buffers.

Results and Implications

The cash budget reveals specific months with heightened financing needs—most notably October, due to the office payment—and illustrates how late payments or sales decreases could amplify borrowing requirements. Understanding these sensitivities helps management prepare contingency plans, negotiate flexible payment terms, or adjust operational strategies.

Conclusion

Thorough cash budgeting and sensitivity analysis are vital for Marvel Pence’s company to secure a line of credit confidently. The exercise underscores the importance of precise forecasting, proactive financial management, and risk mitigation strategies to ensure liquidity sustainability and favorable borrowing terms.

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