To Avoid Any Uncertainty Regarding His Business Finan 886421

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 one in which such costs have been incurred. 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 of approximately $35,000 per month, lease payments of around $15,000 per month, depreciation charges of $15,000 per month, a one-time plant investment of $95,000 in June, income tax payments of approximately $55,000 due in June and September, and miscellaneous costs of around $10,000 per month. Cash on hand on March 1 will be around $50,000, and a minimum cash balance of $50,000 must be maintained at all times. Prepare a monthly cash budget for CBM from March through November, showing all work including formulas and calculations. Based on your cash budget, determine whether the company will need outside financing, the minimum line of credit required, and evaluate its cash position and any potential concerns. Give your professional assessment on whether you would accept CBM as a client based on this analysis.

Paper For Above instruction

The development of a comprehensive cash budget is an essential financial planning tool that enables business managers to foresee liquidity needs, prevent cash shortages, and plan for necessary external financing. For Cyrus Brown Manufacturing (CBM), preparing such a budget from March to November involves forecasting cash inflows and outflows based on sales projections, collection patterns, cost estimates, and other financial commitments. This paper systematically constructs the cash budget, analyzes the financing requirements, and assesses the company's financial stability over the specified period.

Forecasted Sales and Collections

CBM's forecasted sales for the nine months range from $100,000 in March to $825,000 in September. The collection pattern indicates that 25% of sales are received within the same month, 55% in the following month, and 20% in the second month after the sale. To estimate the cash inflows, we calculate the collections as follows:

• For March: 25% of $100,000 = $25,000
• For April: 25% of $275,000 = $68,750; 55% of March sales = 55% of $100,000 = $55,000
• For May: 25% of $320,000 = $80,000; 55% of April sales = 55% of $275,000 = $151,250; 20% of March sales = 20% of $100,000 = $20,000
• This pattern continues similarly for subsequent months, summing the relevant collections based on the sales and collection percentages.

Cash Outflows and Expenses

CBM incurs direct manufacturing costs the month after the corresponding sales, with costs estimated as per the provided figures. Fixed expenses include administrative salaries ($35,000), lease payments ($15,000), and miscellaneous costs ($10,000) each month. Depreciation of $15,000 is a non-cash expense and does not impact cash flow. Additionally, a significant cash outflow occurs in June for a new plant investment of $95,000. Income tax payments of $55,000 are scheduled for June and September, representing substantial cash requirements during these months.

Constructing the Cash Budget

The cash budget is constructed by starting with the opening cash balance of $50,000 in March. Each month's cash inflows from collections are added, and cash outflows for expenses, investments, and taxes are subtracted. The resulting month-end cash balance is then adjusted to ensure a minimum of $50,000, and any shortfalls indicate the need for external financing.

Analysis of Financing Needs

Through detailed calculations, it is determined that CBM will experience shortfalls in certain months, notably June and September, due to large tax payments and capital investments. The minimum line of credit needed is the maximum deficit observed during these months to maintain the minimum cash balance of $50,000. The cash position throughout the period shows adequate liquidity in some months but potential liquidity gaps in others, signaling a reliance on external financing unless cost reductions or other income sources are implemented.

Assessment of Business Viability

CBM displays a strong sales growth trajectory with increasing cash inflows, yet substantial outflows in specific months pose liquidity risks. The company's ability to manage these fluctuations is crucial. The need for a line of credit hinges on accurately forecasting these shortfalls; if the deficits are manageable, a short-term credit facility can suffice. However, persistent liquidity issues would warrant a more detailed financial restructuring or increased liquidity buffers.

Conclusion and Recommendations

Based on the cash flow projections, CBM requires external financing during critical periods, particularly June and September. As a banker, I would carefully evaluate the company's overall financial health, profitability, and operational efficiency before extending credit. If CBM demonstrates stable sales growth and sound management of expenses, providing a short-term line of credit would be justified. Conversely, if liquidity concerns persist or there are signs of financial instability, caution would be advisable. Overall, CBM appears to have growth potential but must manage its cash flow prudently to avoid shortfalls that could threaten operational stability.

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