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:
He has also gathered the following collection estimates regarding the forecast sales:
- Payment collection within the month of sale = 10%
- Payment collection the month following sales = 65%
- Payment 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:
Additional financial information is as follows:
- 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.
Show all work, including formulas and calculations used to arrive at the financial values.
Prepare a monthly cash budget for Cyrus Brown Manufacturing for the 9-month period of March through November. Use Microsoft Excel to prepare the monthly cash budget.
Based on your cash budget findings, answer the following questions:
- Will the company need any outside financing?
- What is the minimum line of credit that CBM will need?
- What do you think of CBM's cash position during the budget period? Do you see any concerns for the company in this regard?
- If you were a bank manager, would you want CBM as your client? Why or why not?
You have been asked to prepare the cash budget for CB Manufacturing and then to answer a set of questions that follow:
In order to prepare the budget you need to note the following important points:
1) To calculate the sales collection under cash receipts, you have to take careful note of the amount or percentages that are collected in each month. In the excel file attached, you will notice that a break down is given of the sales collection (for illustration purposes) and the formulas are also given.
2) For the cash disbursement section, note that manufacturing payments are made in the month following the month when the costs are incurred. So the costs incurred for March for example are paid in April, and so on.
3) Salaries of approximately $35,000 are incurred every month and should be included under the cash disbursements section. Likewise, lease payments of $15,000 and ...
This solution provides you with information as to how to arrive at a cash budget for the nine month period ending November for Cyrus Brown Manufacturing. It also helps you to answer questions related to whether the company will need any outside financing and/or what is the minimum line of credit that CBM will need.