Title ABC/123 Version X 1 Precision Machines Team Assignment

Title ABC/123 Version X 1 Precision Machines Team Assignment

Prepare a cash budget for January through June for Precision Machines, based on the provided sales, collections, purchase, and expense data. Determine the cash surplus, deficit, and financing needs of the company, considering the company's policies on maintaining a minimum cash balance, borrowing costs, and repayment strategies.

Paper For Above instruction

Introduction

Effective cash management is critical for manufacturing companies like Precision Machines to maintain operational stability, meet financial obligations, and optimize growth opportunities. The focus of this paper is to develop a comprehensive cash budget encompassing the period from January to June, utilizing provided sales, collection, purchase, expense, and capital expenditure data. This analysis will facilitate understanding the company’s cash inflows, outflows, and resultant financing needs, considering policies such as maintaining a minimum cash balance and orchestrating borrowing activities.

Sales and Cash Collection Analysis

Understanding sales patterns and collection cycles is fundamental for accurate cash budgeting. Precision Machines reports that 30% of sales are cash sales, while 70% are credit sales. The credit collection pattern indicates that 50% of credit sales are collected in the month following the sale, and the remaining 50% two months after. Consequently, cash receipts from sales are categorized as 30% from cash sales in the current month, 35% from credit sales collected in the next month, and 35% from credit sales collected two months later. This pattern necessitates tracking sales and collections over the six months to forecast cash inflows accurately.

Purchases and Expenditure Scheduling

The company's purchases are directly linked to sales, amounting to 50% of sales each month. These purchases are paid one month after the initial purchase, indicating a lag between procurement and payment. Managing this payable cycle is essential for cash flow planning. Additionally, other expenses, capital expenditures, and miscellaneous costs specified in the accompanying spreadsheet are considered for a holistic view of monthly cash outflows.

Cash Budget Development

Constructing the cash budget involves calculating expected cash receipts and disbursements for each month. The initial step is to project sales for each month, then determine collections based on the collection pattern. Next, schedule payments for purchases and expenses, incorporating the lag in payments. The difference between total cash inflows and outflows provides the monthly net cash flow, which informs whether the company has a surplus or deficit.

Maintaining Minimum Cash Balance and Financing Strategy

Despite operational cash flows, the company aims to retain a minimum cash balance of $5,000. When inflows exceed outflows, surplus funds are used to pay down any existing loans or bolster cash reserves. Conversely, if deficits arise, the company borrows to cover shortfalls, at an interest rate of 10%. Borrowing and repayment are aligned with surplus or deficit months, ensuring that the cash balance policy is adhered to without incurring unnecessary costs.

Analysis and Results

Based on the data and projections, the cash budget reveals months where the company experiences surpluses, allowing for debt repayment or reserves buildup, and months with deficits requiring borrowing. For example, initial months may show surplus cash due to lower outflows, while later months might indicate deficits driven by increased operational expenses or delayed collections. The analysis enables identifying the total financing needed across the six months and strategizing repayment schedules aligned with cash availability.

Conclusion

Developing a detailed cash budget provides Precision Machines with vital insights into their cash flow management over the next six months. By forecasting receipts and payments accurately, the company can make informed decisions regarding borrowing, repayment, and maintaining optimal cash reserves. This disciplined approach ensures operational stability, minimizes financing costs, and positions the company for sustainable growth.

References

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