1. Prepare all three cash budgets for the pessimistic, most likely, and optimistic sales forecasts. The wages will change a small amount based upon the level ofsales. Under a pessimistic view, the wages and salaries could decrease by 10% by cutting back on some hours for the employees. Under the optimistic view wages will increase by 15% because some overtime will have to be paid.

2. Using these cash budgets, estimate what would be the month with the most cash need (when Douglas would have to borrow money) and how much he would need to borrow.

3. Based on these tfuee scenarios, how comfortable do you think Douglas should be about being able to pay back any loans that he would have to borrow. What recommendations could you make which might help Douglas improve the cash flow of his business?

In Search of a Cash Flow Forecast I'll never make that mistake again," Douglas Martinez said to a lot of work to do. I've got a week to figure out how to put to himself as he got into his car. Martinez had just left a meeting with gether a cash budget to supplement my loan application. Maybe his banker, who had not been optimistic about the chances of that consultant can help me." Martinez's plumbing supply company getting the loan it needed. When he returned to his office, Martinez gathered up the file should have been better prepared for the meeting," he mut folders containing all of his fast-growing company's financial reports tered, knowing that he could be angry only at himself. "That and printed his projected revenues and expenses using his computer consultant at the Small Business Development Center [SBDC] was spreadsheet. Then he called the SBDC consultant he had worked right. Bankers' primary concern when making loans is cash flow. with when he was launching his company and explained the situa- At least I salvaged the meeting by telling him Iwasn't ready tion. When he arrived at the consultant's office that afternoon, they to officially apply for a loan yet," Martinez thought. "But I've got started organizing the information. Here is what they came up with Current cash balance $8,750 Sales pattern 71% on credit and 29% in cash Collections of credit sales 68% in the same month as the sale 19% in the first month after the sale 7% in the second month after the sale 6% never collected (bad debts) Sales forecasts Pessimistic Most Likely Optimistic $18,750 July (actual) $19,200 August (actual) September (actual) $17, 840 $19,750 October $15,000 $17,500 November $14,000 $16,500 $18,500 $14,000 December $11,200 $13,000 $9,900 $14,900 January S12,500 February $10,500 $13,800 $15,800 $17,500 March $13,500 $19,900 Utilities expenses $800 per month Rent $1,200 per month Truck loan $317 per month The company's wages and salaries (including payroll taxes) estimates are the following: October $2,050 November $1,825 December $1,725 $1,725 January $1,950 February March $2,425 (continued)