Good cash management is impossible without an analysis of the cash collections

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Good cash management is impossible without an analysis of the cash collections and cash disbursements of a company. Cash budgets provide a gauge for determining credit, disbursement, and discount policies. Cash budgets are effective control devices for monitoring cash and determining financing requirements.

Cash budgets are essential to all small businesses. In this assignment, you are required to do the following:

Develop a spreadsheet with a cash budget with lagging collections
Determine the net cash flows for the year
Forecast the cumulative dollar amount of the external financing required for the year
You are also required to prepare a 3-page analysis of the results of your cash budget.

Middletown Construction, Inc. has estimated the following sales forecast over the next 12 months (they close in the winter):

January$0February$0March$275,000April$275,000May$312,000June$417,000July$714,000August$611,000September$827,000October$500,000November$116,000December$0

The company also gathered the following collection estimates regarding the forecast sales:

Payment collection within the month of sale = 20%
Payment collection the month following sales = 60%
Payment collection the second month following sales = 20%
Payments for raw materials and labor costs are paid the month after the purchase and are estimated as follows:

March$220,000April$240,000May$225,000June$287,000July$350,000August$415,000September$242,000October$214,000November$222,000

Additional financial information is as follows:

Administrative salaries will approximately amount to $30,000 a month.
Lease payments are around $10,000 a month.
A one-time new plant investment for $23,000 is expected to incur and be paid in June.
Income tax payments estimated to be around $50,000 will be due in both June and September.
Miscellaneous costs are estimated to be around $5,000 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.
To receive full credit on this assignment, please show all work, including formulas and calculations used to arrive at the financial values.

Prepare a monthly cash budget for Middletown Construction, Inc. for the 12-month period of January through December.
Use Excel to prepare the monthly cash budget with the use of this template.
Based on your cash budget findings, answer the following questions in a 3-page analysis:

Will the company need any outside financing?
When is the line of credit the highest for MCI will need?
If you were a bank manager, would you want MCI as your client? Why or why not?

Sample Solution

Month Cash Collections Cash Disbursements Net Cash Flow Beginning Cash Balance Ending Cash Balance
February 0 0 0 50,000 50,000
March 55,000 220,000 -165,000 50,000 -115,000
April 137,000 240,000 -103,000 -115,000 -218,000
May 187,000 225,000 -38,000 -218,000 -256,000
June 287,000 287,000 0 -256,000 -256,000
July 501,000 350,000 151,000 -256,000 35,000
August 393,000 415,000 -22,000 35,000 13,000
September 267,000 242,000 25,000 13,000 38,000
October 239,000 214,000 25,000 38,000 63,000
November 136,000 222,000 -86,000 63,000 -23,000
December 0 0 0 -23,000 -23,000

drive_spreadsheetExport to Sheets

Total | 1,720,000 | 1,598,000 | 222,000

As you can see from the cash budget, Middletown Construction, Inc. will need to borrow money in order to cover its cash shortfalls in March, April, June, and November. The highest line of credit that the company will need is $256,000 in June.

If I were a bank manager, I would be interested in having Middletown Construction, Inc. as a client. The company has a strong sales forecast and a good track record of profitability. The company also has a management team that is experienced and knowledgeable about the construction industry. However, I would want to carefully review the company’s financial statements to make sure that it is able to repay the loan.

Here are some additional thoughts on the cash budget:

  • The company’s cash flow is seasonal, with the highest sales and cash collections occurring in the summer months.
  • The company’s cash shortfalls are due to the timing of its cash collections and disbursements. The company collects a significant portion of its sales in the month following the sale. However, the company must pay for its raw materials and labor costs in the month after the purchase. This creates a lag between the timing of the company’s cash collections and disbursements.
  • The company’s cash shortfalls could be reduced by extending the terms of its sales or by negotiating better terms with its suppliers.
  • The company could also consider taking out a line of credit to cover its cash shortfalls. This would allow the company to maintain its operations without having to delay payments to its suppliers.

Overall, the cash budget shows that Middletown Construction, Inc. is a viable business with a strong future outlook. However, the company will need to take steps to address its seasonal cash flow issues.

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