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 nine months:
March 2004 $250,000
April 275,000
May 320,000
June 450,000
July 575,000
August 700,000
September 825,000
October 350,000
November 285,000
He has also gathered the following collection estimates regarding the forecast sales: Collection within the month of sale, 10%; collection the month following sales, 65%, and collection the second month following sales, 25%. Payments for direct manufacturing costs like raw materials and labor are made during the month that follows the one in which such costs have been incurred. These costs are estimated as follows:
March 2004 $187,500
April 206,250
May 240,000
June 337,500
July 431,250
August 525,000
September 618,750
October 262,500
Administrative salaries will approximately amount to $35,000 a month; lease payments around $15,000 a month; depreciation charges, 15,000 a month; a one-time new plant investment in the amount of $95,000 is expected to be incurred and paid in June; income tax payments estimated to be around $ 55,000 will be due in both June and September; and finally, miscellaneous costs are estimated to be around $10,000 a month. Cash on hand on March 1 will be around $50,000; and a minimum cash balance of $50,000 shall be on hand at all times.
- Prepare a monthly cash budget for Cyrus Brown Manufacturing for the nine month period, March through November.
Necessary calculations and the Cash Budget are on the attached excel file.
b. Based on your findings in part b, will the company need any outside financing?
Based on part a, there is a need for external financing since the cash inflows are less than the cash outflows in March, April, and June.
c. What is the minimum line of credit that CBM will need?
The minimum line of credit should cover the maximum requirements for the period which occurs in June and is equal to $213,750.
d. What do you think of CBM’s cash position during the budget period? Do you see any concerns for the company in this regard?
Generally speaking, CBM cash position looks satisfactory except for the month sof March, April, and June where there is a cash deficit - such a deficit is a short-term one because in the other months the company would start having an excess in cash which could be used in settling the borrowed amounts. Based on that, I do not believe that CBM should have any concerns in this regard.
e. If you were a bank manager would you want CBM as your client? Why or why not?
As a bank manager, I would be interested in short term liquidity of the firm since the firm’s borrowing needs are all short-term. The cash shortages were mainly due to lump sums of income tax and new plant investment, in later month, however the increase in sales results in high excess cash flows that can easily cover the short-term borrowings. This situation Proves CBM to be a promising customer, therefore I would want the firm as a client.