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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
He has also gathered the following collection estimates regarding the forecast sales: Collection within the month of sale, 10%; collection the month following sales, 75%, and collection the second month following sales, 15%. 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
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 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 May 1 will be around $50,000; and a minimum cash balance of $50,000 shall be on hand at all times.
Prepare an estimate of the required financing needs (or excess funds) for each month during the budget period. Based on your findings, will the company need any outside financing? If so, how much?
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This solution provides a step by step response which illustrates how to prepare an estimate of the financing needs being addressed in this question. An Excel file is attached and needs to be opened in order to view the solution. Since this solution is calculation-based, one can click directly onto the cells to understand how the estimates have been computed.
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