Cyrus Brown Cash Budget
American InterContinental University
Estimated Sales Forecast Scenario
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:
Cyrus Brown Manufacturing (CBM) Sales Forecast
| March | $100,000 |
|---|---|
| April | $275,000 |
| May | $320,000 |
| June | $450,000 |
| July | $700,000 |
| August | $700,000 |
| September | $825,000 |
| October | $500,000 |
| November | $115,000 |
He has also gathered the following collection estimates regarding the forecast sales:
Payment collection within the month of sale = 25%
Payment collection the month following sales = 55%
Payment collection the second month following sales = 20%
Formulas:
Cyrus Brown Manufacturing (CBM) Schedule of Cash Disbursements
- Month of Sales x 25% or 0.25 Calculate each month using this formula for Months March – November.
- Following Sales x 55% or 0.55 Calculate each month using this formula for months April – November.
- Second Month Sales x 20% or 0.2 Calculate each month using this formula for May – November.
- Total Collections Add the sum for each month to obtain the monthly cash collections.
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 | $187,500 |
|---|---|
| April | $206,250 |
| May | $375,000 |
| June | $337,500 |
| July | $431,250 |
| August | $640,000 |
| September | $395,000 |
| October | $425,000 |
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.
| March | April | May | June | July | August | September | October | November | |
| Direct Manufacturing Costs | $187,500.00 | $206,250.00 | $375,000.00 | $337,500.00 | $431,250.00 | $640,000.00 | $395,000.00 | $425,000.00 | |
| Administrative Salaries | $35,000.00 | $35,000.00 | $35,000.00 | $35,000.00 | $35,000.00 | $35,000.00 | $35,000.00 | $35,000.00 | $35,000.00 |
| Lease Payments | $15,000.00 | $15,000.00 | $15,000.00 | $15,000.00 | $15,000.00 | $15,000.00 | $15,000.00 | $15,000.00 | $15,000.00 |
| New Plant Investment ($15,000 Dep) | $95,000.00 | $80,000.00 | $65,000.00 | $50,000.00 | $35,000.00 | $20,000.00 | |||
| Income Tax | $55,000.00 | $55,000.00 | |||||||
| Miscellaneous Cost | $10,000.00 | $10,000.00 | $10,000.00 | $10,000.00 | $10,000.00 | $10,000.00 | $10,000.00 | $10,000.00 | $10,000.00 |
| Total Disbursements | $247,500.00 | $266,250.00 | $435,000.00 | $547,500.00 | $571,250.00 | $765,000.00 | $560,000.00 | $520,000.00 | $80,000.00 |
Formulas:
Cyrus Brown Manufacturing (CBM) Cash Budget
- Plug in the all payment; raw materials and labor are made during the month using the estimated cost to include any additional information.
- Depreciation= $95,000 – $15,000 = $80,000 using previous months’ new plant – $15,000 each month to the end of the year.
- Income tax with be will be due in both June and September.
- Calculate the Total Disbursements for each month by adding all expense for each month.
Formulas:
Questions
- External Financing = -(collections + BCH) +50,000 = $142,000 for April
- Cumulative Total Financing = 35,000 + $142,000 = $177,5000 Repeat this formula from March – November. Add the previous CTF + External Financing = CTF
Will the company need any outside financing?
Yes, based on the Excel spreadsheet calculations there is a need for external financing because the cash flow collections are less than the cash outflows disbursement in March through August.
What is the minimum line of credit that CBM will need? The minimum line of credit should cover the maximum amount of cash needed for the month of August and is equal to $765.000.
What do you think of CBM’s cash position during the budget period? Do you see any concerns for the company in this regard?
Based on the numbers, CBM it shows that due to the cash flow deficits for the first 6 out of the 9 months looks grim. Based on this we deliver that CBM should be concerned,
If you were a bank manager, would you want CBM as your client? Why or why not?
As a Bank Manager, we feel a short-term investment would be best for CBM. The cash shortages were due to the large sums on income taxes, new plant investment and collections. In the later months, you can see an increase in sales and increased cash flow that could easily cover a short-term borrowing. We feel it would be a promising situation.
References
AIU. (2013). Short-Term Financil Management. Retrieved from Muse: https://class.aiu-online.com/_layouts/MUSEViewer/MUSE.aspx?mid=4613428
Intelipath. (2014). Long Term Financial Managment. Retrieved from AIU Intelipath week 4: https://adapt.careered.com/RealiseIT/Main/LearnerSkin.aspx/1/15/eMyLearning_-1_9660308_-1_-6/
MUSE. (2013). Long-Term Financial Management. Retrieved from AIU MUSE : https://class.aiu-online.com/_layouts/MUSEViewer/MUSE.aspx?mid=4613394
Wisdom, W. o. (2013). Financial Management. In E. Board, Financial Management (p. chapter 9). Words of Wisdom, LLC.
XplainD. (2015). Incremental Cash Flow. Retrieved from XplainD: http://xplaind.com/760410/incremental-cash-flow