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 Answer
Sample Answer
Cash Budget Analysis for Middletown Construction, Inc.
Cash Budget Spreadsheet:
Month Sales Forecast Collections Raw Materials & Labor Costs Net Cash Flow
January $0 $0 $0 -$0
February $0 $0 $0 -$0
March $275,000 $55,000 (20%) $220,000 $-185,000
April $275,000 $165,000 (60%) $240,000 -$75,000
May $312,000 $62,400 (20%) $225,000 $87,400
June $417,000 $250,200 (60%) $287,000 -$36,800
July $714,000 $428,400 (60%) $350,000 $78,400
August $611,000 $122,200 (20%) $415,000 -$307,800
September $827,000 $496,200 (60%) $242,000 $254,200
October $500,000 $100,000 (20%) $214,000 $-114,000
November $116,000 $23,200 (20%) $222,000 -$123,800
December $0 $0 $0 -$0
Net Cash Flows for the Year:
– Total Cash Inflows: $1,702,200
– Total Cash Outflows: $1,744,000
– Net Cash Flow for the Year: -$41,800
Forecasted External Financing Required:
– Cumulative Dollar Amount of External Financing Required for the Year: $41,800
Cash Budget Analysis:
Middletown Construction’s cash budget analysis reveals several key insights:
1. Seasonal Sales Impact: The company experiences varying sales volumes throughout the year, with peak sales in the summer months (July and August) and lower sales in the winter months. This seasonality impacts cash flows and necessitates effective cash management strategies to address fluctuations.
2. Cash Collection Patterns: The collection estimates indicate that a significant portion of sales revenue is received in the month following the sale (60%), with the remainder spread over the subsequent months. Understanding these collection patterns is crucial for managing working capital and ensuring sufficient liquidity to cover operating expenses.
3. Raw Materials and Labor Costs: Payments for raw materials and labor costs are incurred the month after the purchase. This timing misalignment between cash inflows from sales and outflows for expenses underscores the importance of cash budgeting to anticipate financing requirements and maintain cash flow stability.
4. External Financing Requirement: The net cash flow for the year indicates a deficit of $41,800, highlighting the need for external financing to cover operational expenses during periods of negative cash flow. Securing external financing sources such as lines of credit or short-term loans can help bridge cash flow gaps and support business operations during lean months.
In conclusion, developing and analyzing a cash budget is essential for small businesses like Middletown Construction to effectively manage cash flow, monitor financial performance, and plan for financing needs. By proactively addressing cash collection and disbursement patterns, businesses can optimize liquidity management and ensure financial stability throughout the year.
