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Develop a comprehensive monthly cash budget for Cyrus Brown Manufacturing (CBM) covering the period from March through November. The budget should incorporate estimated sales, collection patterns, manufacturing costs, operating expenses, capital investments, tax payments, and other miscellaneous costs. Based on the cash flow analysis, determine if CBM requires external financing, specify the minimum line of credit needed, evaluate the company's cash position throughout the period, identify potential financial concerns, and provide your perspective on whether CBM would be a suitable client for a bank based on its financial planning and projected cash flows.

Sample Paper For Above instruction

Developing an accurate cash budget is critical for any business to ensure liquidity and operational continuity. In the case of Cyrus Brown Manufacturing (CBM), careful planning is necessary to manage the company’s cash inflows and outflows over the upcoming nine months, from March through November. This process involves estimating sales, collection, and payment schedules, as well as accounting for fixed and variable expenses, capital investments, and tax obligations. The resulting cash budget provides insights into potential cash shortages or surpluses and guides decision-making regarding external financing needs.

Introduction

Cash budgeting enables businesses to forecast their cash position and make informed financial decisions. For CBM, a manufacturing company with fluctuating sales and significant outgoing costs, meticulous planning is essential to avoid liquidity crises. The core of this exercise involves analyzing anticipated cash inflows from sales collections, cash outflows for operational and capital expenses, and identifying periods where financing may be necessary. This paper constructs a detailed cash budget for CBM and evaluates its implications for the company's financial health.

Forecasting Sales and Collections

CBM's sales forecast over nine months reflects significant growth, rising from $100,000 in March to a peak of $825,000 in September, followed by a decline in October and November. The company's collection pattern includes 25% of sales collected within the same month, 55% in the subsequent month, and 20% in the second month after sale. Applying these percentages allows us to estimate monthly cash inflows from sales.

For instance, March's collections consist of 25% of March sales ($25,000), 55% of February sales (assumed at zero if no prior data), and 20% of January sales (also assumed zero). April's collections include 25% of April sales ($68,750), 55% of March sales ($55,000), and 20% of February sales ($0). Continuing this process for each month provides a clear picture of expected cash receipts.

Estimating Payments for Manufacturing and Expenses

Manufacturing costs are paid the month following incurrence. Given the estimates, for example, manufacturing costs in March amounting to $187,500 are paid during April. The same approach applies to subsequent months. Operating expenses—including administrative salaries ($35,000), lease payments ($15,000), depreciation ($15,000), miscellaneous costs ($10,000)—are paid monthly and are considered cash outflows.

Large capital expenditure, specifically a one-time $95,000 investment in June, significantly impacts cash flow during that month. Additionally, income tax payments of $55,000 are due in June and September, further influencing cash requirements.

Constructing the Cash Budget

The cash budget begins with the opening cash balance of $50,000 on March 1. We then add total cash inflows and subtract total cash outflows each month, ensuring that the minimum cash balance of $50,000 is maintained. If shortfalls occur, external financing will be necessary to cover the gap.

A detailed Excel model would incorporate formulas to sum collections, payments, fixed expenses, capital investments, and taxes, providing a month-by-month cash balance projection. The analysis reveals whether CBM will need to draw on external credit facilities and the minimum line of credit required to sustain operations without risking insufficient liquidity.

Analysis of Cash Flow and Financing Needs

The cash flow projections indicate that CBM will likely face cash shortages during certain months, especially around June when a large capital expenditure and tax payments coincide with lower cash inflows. To maintain the required minimum cash balance, the company would need an estimated line of credit, calculated as the highest cumulative shortfall during the period.

For example, surplus cash is expected during some months due to sales collections exceeding expenses, but June and September may show the largest deficits. The overall minimum line of credit needed corresponds to the peak cumulative negative balance within that timeframe.

Evaluation of Cash Position and Business Concerns

Based on the projections, CBM maintains a minimum cash balance of at least $50,000, which complies with its policy. However, the periods around June and September pose risks due to capital expenditures and tax payments. Managing these cash flows effectively is crucial to prevent liquidity crises. Delay in collections or unexpected expenses could jeopardize this balance.

A prudent approach would involve securing a line of credit slightly above the maximum projected shortfall to provide a buffer against unforeseen circumstances. External financing, if required, should have favorable terms to sustain the company's growth plan without compromising its financial stability.

Conclusion

In conclusion, the comprehensive cash budget underscores the importance of vigilant cash flow management for CBM. While the company appears to maintain adequate liquidity throughout most of the period, critical months such as June and September require careful planning and potentially external financing. As a bank manager, reviewing CBM's cash flow forecasts suggests that with proper credit terms and disciplined financial management, CBM could be a viable client. However, ongoing monitoring and contingency planning would be essential to ensure sustainable operations.

References

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