Titleabc123 Version X1 Precision Machines Team Assignmentfin

Titleabc123 Version X1precision Machines Team Assignmentfin370 Versi

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 on the spreadsheet, prepare a cash budget for January through June and determine the cash surplus, deficit, and the financing needs of the company.

Paper For Above instruction

Introduction

Effective financial management is crucial for manufacturing companies like Precision Machines to ensure liquidity and operational efficiency. Preparing a detailed cash budget allows the company to anticipate cash inflows and outflows, facilitating strategic decision-making about borrowing and investment. This paper examines the process of constructing a cash budget for Precision Machines for six months, incorporating sales collections, purchase payments, expenses, and financing activities based on provided data and historical sales patterns.

Sales and Collections Dynamics

Understanding the company’s sales and collection cycles is fundamental to cash budgeting. Precision Machines' sales comprise 30% cash sales and 70% credit sales. The credit collection pattern indicates that 50% of credit sales are collected in the month following the sale, and the remaining 50% in the subsequent month. Consequently, cash collections from sales are distributed as follows: 30% of total sales in the month of sale, 35% in the first month after sale, and 35% in the second month after sale. This pattern influences the timing of cash inflows and requires detailed tracking of monthly sales to accurately project collections.

Purchases and Payment Schedule

Material purchases are calculated as 50% of the current month’s sales, aligning purchasing activity with sales volume. Payments for these purchases are made one month after the purchase date, implying that cash outflows for purchases lag sales by one month. This timing affects the cash flow and must be incorporated into the cash budget to accurately reflect the company’s payment obligations.

Expenses, Capital Expenditures, and Other Cash Flows

In addition to sales and purchase activities, other expenses such as salaries, operational costs, and capital expenditures impact cash flow. All these expenditures are scheduled for the six months based on the attached data. Anticipating these expenses is critical for determining surplus or deficit periods, and for planning borrowing or investment strategies.

Cash Balance Policy and Financing Strategy

The company maintains a minimum cash balance of $5,000, which acts as a liquidity buffer. Any surplus cash beyond this minimum will be used to pay down existing loans, while any deficit will prompt the company to borrow funds at an interest rate of 10%. The strategy involves balancing cash flow timing with the liquidity requirement, ensuring the company remains solvent and financially flexible.

Cash Budget Construction

Using the provided sales, expenses, and capital expenditure data, a month-by-month cash budget will be prepared from January to June. The process involves calculating projected cash inflows from sales collections, deducting cash outflows for purchases and other expenses, and assessing the resulting cash surplus or deficit. Loans will be arranged to cover deficits, and surplus funds will be used to reduce previous borrowings, considering the 10% borrowing cost.

Analysis and Conclusion

The finalized cash budget will reveal periods of surplus and deficit, guiding the company's financing decisions. It will also help determine the amount of external financing needed and the timing of repayments. Effective cash flow management, aligned with sales and expense patterns, ensures financial stability and supports operational growth. The approach outlined highlights the importance of detailed cash planning in manufacturing firms operating in dynamic markets.

References

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