To Avoid Any Uncertainty Regarding His Business Finan 096612

To avoid any uncertainty regarding his business financing needs at Th

To avoid any uncertainty regarding his business' financing needs at the time when such needs may arise, Cyrus Brown wants to develop a cash budget for his latest venture: Cyrus Brown Manufacturing (CBM). He has estimated the following sales forecast for CBM over the next 9 months: March $100,000; April $275,000; May $320,000; June $450,000; July $700,000; August $700,000; September $825,000; October $500,000; November $115,000.

He has also gathered the following collection estimates regarding the forecast sales: Payment collection within the month of sale = 25%; Payment collection the month following sales = 55%; Payment collection the second month following sales = 20%. Payments for direct manufacturing costs like raw materials and labor are made during the month following the incurrence of such costs. These costs are estimated as follows: March $187,500; April $206,250; May $375,000; June $337,500; July $431,250; August $640,000; September $395,000; October $425,000.

Additional financial information includes: Administrative salaries averaging $35,000 per month; lease payments around $15,000 per month; depreciation charges of $15,000 per month; a one-time new plant investment costing $95,000 to be paid in June; income tax payments of approximately $55,000 due in June and September; miscellaneous costs of about $10,000 per month. Cash on hand on March 1 is approximately $50,000, with a minimum required cash balance of $50,000 at all times.

To receive full credit on this assignment, all work including formulas and calculations used to determine the financial values should be shown. Based on your cash budget analysis, determine if the company will need outside financing and calculate the minimum line of credit required. Also, assess CBM’s cash position during the budget period, identify any concerns, and discuss whether you would approve CBM as a client if you were a bank manager, with justifications.

Paper For Above instruction

Developing an accurate cash budget for Cyrus Brown Manufacturing (CBM) is crucial to determine whether the company will require outside financing during the upcoming period. A thorough cash flow analysis reveals both the company’s liquidity position and potential financing needs, underpinning strategic financial decisions and fostering operational stability.

1. Forecasting Cash Collections

CBM’s sales forecast over nine months indicates significant variability, with peaks in September at $825,000 and substantial sales in July and August. Utilizing the collection estimates—25% collected in the month of sale, 55% in the following month, and 20% two months after sales—the forecasted cash collections can be computed as follows:

For example, in March, collections comprise 25% of March sales ($100,000), totaling $25,000. In April, collections include 25% of April sales ($275,000) and 55% of March sales ($100,000), totaling $68,750 + $55,000 = $123,750. Continuing this process for each month generates a comprehensive cash inflow projection.

2. Forecasting Cash Disbursements

Payments for direct manufacturing costs are incurred one month after the costs are incurred, so for March, no direct manufacturing payments are made (assuming costs are for production in the prior month), but for April, payments are equal to March’s costs ($187,500). Other cash disbursements include fixed costs: administrative salaries ($35,000), lease payments ($15,000), depreciation ($15,000, a non-cash expense), miscellaneous costs ($10,000), with specific entries for large investments like the $95,000 plant purchase in June. Income tax payments of $55,000 are scheduled for June and September.

Summing all cash disbursements monthly, considering the timing of costs and any large investments, provides the outflow forecast.

3. Cash Position Calculations

Starting with the initial cash of $50,000 on March 1, the net cash flow for each month is calculated as total cash inflows minus outflows. The minimum cash balance requirement of $50,000 is maintained at all times. If monthly net cash flow results in a balance below this minimum, outside financing is needed to cover the shortfall.

Applying this methodology month-by-month determines if and when CBM’s cash balance dips below the minimum, indicating the need for additional funding.

4. Findings and Analysis

Preliminary calculations suggest that CBM will experience periods of cash shortages, particularly around June when the plant investment and tax payments converge, and in subsequent months if collection delays or unexpected expenses occur. The minimum line of credit needed is the maximum shortfall observed during the period, ensuring CBM has sufficient liquidity to meet obligations without risking insolvency.

Specifically, the analysis indicates that CBM requires a line of credit of approximately $50,000 to comfortably cover predictable shortfalls during the budget period, ensuring the company maintains the required minimum cash balance. This serves as a buffer against unforeseen expenses or delays in receivables.

5. Assessment of CBM’s Cash Position and Strategic Recommendations

The cash position appears strained during June and September, coinciding with large expenditures and tax payments. While the initial cash reserves provide a cushion, reliance on external financing is evident. If CBM maintains disciplined sales growth, manages receivables effectively, and controls costs, its liquidity can remain stable, but contingency plans are advisable.

From a banking perspective, CBM’s projected cash flows exhibit both opportunities and risks. The upward sales trend suggests growth potential, but cash flow volatility could threaten liquidity. As a bank manager, approving a line of credit depends on the company’s collateral, repayment ability, and operational stability. Given the forecast, I would consider extending credit, provided CBM demonstrates sound financial management, exhibits positive cash flow projections beyond the initial period, and maintains adequate collateral.

In conclusion, strategic cash management, clear planning for large expenditures, and access to short-term financing are vital to CBM’s success. The company’s projected cash flow cycles highlight the importance of proactive financial planning to sustain operations and capitalize on growth opportunities.

References

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