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CASH FLOW ANALYSIS - FUN N'GAMES A) SALES IN JAN. = 1000 UNITS B) SALES GROWTH = 500 UNITS PER MONTH C) PRICE = $22 per unit D) COST = $14 per unit E) OVERHEAD EXPENSES = $4000 per month F) Payment for all sales received in 60 days (2 months collection cycle) G)INVENTORY POLICY: purchase enough to have month end inventory sufficient for next month sales - Paid when received H) BEGINNING BALANCE SHEET: Assets Cash $58,500 Liabilities $ 0 Accounts Receivable 27,500 Equity Inventory 14,000 Common Stock $100,000 Retained Earnings O $100,000 $100,000 Develop a spreadsheet program to project Fun N' Games' MONTHLY (for 12 months): -Income statement -Cash Flow -Balance Sheet (month end). This should be based on data in the case and should be done for 12 or more months beginning January of the year in the case. You know you have a good start if the results match the solution handed out in class. A. Rerun the initial budget with a 35% tax rate. How does this impact the profitability and the cash flow of FG? What assumptions did you make about tax payments? B. (no need to write out answer to this question B) what does this suggest about the cash flow and profitability of FG? How would this impact you as a small business manager and what would you want to say to the IRS based on this result. (Think twice before you actually say anything to the IRS.) Is this the reason that many in government were pushing for preventing increases in small business tax rates in late 2010? FROM NOW ON, AS ALWAYS, TAXES NEED TO BE INCLUDED! Complete C or D and complete E. D is a bit more difficult, as you must be careful about how you transition to a different inventory policy. This also applies to changes in collections, payment cycles, and inventory management that impact cash flow and income. Complete For G. More practice with this type of analysis can help you develop this sometimes-invaluable capability. This is a particularly valuable if you are going to be developing business plans for new services and products in a business, startup of new businesses, etc. C. How much would you have to raise prices to eliminate the cash deficit projected in A? Rerun budget to determine this. (If the answer seems ridiculous, you probably did this right, at least mathematically!) D. Could you eliminate the cash deficit by reducing inventory? What target inventory level would solve the cash deficit problem? (REMEMBER - YOU CANNOT CHANGE HISTORY. New methods of operations can only be changed today and into the future.) E. How much slower would FG have to grow to avoid a cash deficit? (What is FG's Internal sustainable rate of growth?) F. Fun N Games on the Internet: FG can double its sales units if it offers its product for sale on the Internet. The price will be $30 for these Internet units, as there is no retailer between FNG and the customer. The product cost will be $3 more per unit for shipping and special packaging. FG had to purchase equipment costing $25,000 to support this and will have monthly Internet user fees and support costs of $6000. (Higher price on internet sales may well be unrealistic!) If FNG begins this selling program in July, how will this impact cash flow and income? (Don't forget that equipment must be depreciated). How much cash would you seek from an investor based on this information? Could you finance this cash need internally through working capital management? (A typical related question is what cash flow impact would be if launch of new business were delayed by Q months?). G. To quickly build the company size, sell it and take a one-year vacation in Tahiti, you decide to increase sales to 800 units per month. How much cash will be needed, and can this be raised by a combination of faster customer collections, slower vendor payments, negotiating a lower product cost, and reduced inventory levels? Suggest one specific scenario that will finance this growth without borrowing or obtaining equity financing. FEB MAR APRIL MAY JUNE JULY AUGUST SEPT OCT Month JAN INCOME STATEMENT SALES COST OF SALES GROSS MARGIN OTHER EXPENSES INCOME BEFORE TAX INCOME TAX NET INCOME CASH FLOW STATEMENT BEGINNING CASH SOURCES OF CASH COLLECTIONS AIR AVAIL. CASH USES OF CASH ACCTS PAYABLE PAID CASH EXPENSES TOTAL USES ENDING CASH CASH FLOW ANALYSIS - FUN N'GAMES A) SALES IN JAN. = 1000 UNITS B) SALES GROWTH = 500 UNITS PER MONTH C) PRICE = $22 per unit D) COST = $14 per unit E) OVERHEAD EXPENSES = $4000 per month F) Payment for all sales received in 60 days (2 months collection cycle) G)INVENTORY POLICY: purchase enough to have month end inventory sufficient for next month sales - Paid when received H) BEGINNING BALANCE SHEET: Assets Cash $58,500 Liabilities $ 0 Accounts Receivable 27,500 Equity Inventory 14,000 Common Stock $100,000 Retained Earnings O $100,000 $100,000 Develop a spreadsheet program to project Fun N' Games' MONTHLY (for 12 months): -Income statement -Cash Flow -Balance Sheet (month end). This should be based on data in the case and should be done for 12 or more months beginning January of the year in the case. You know you have a good start if the results match the solution handed out in class. A. Rerun the initial budget with a 35% tax rate. How does this impact the profitability and the cash flow of FG? What assumptions did you make about tax payments? B. (no need to write out answer to this question B) what does this suggest about the cash flow and profitability of FG? How would this impact you as a small business manager and what would you want to say to the IRS based on this result. (Think twice before you actually say anything to the IRS.) Is this the reason that many in government were pushing for preventing increases in small business tax rates in late 2010? FROM NOW ON, AS ALWAYS, TAXES NEED TO BE INCLUDED! Complete C or D and complete E. D is a bit more difficult, as you must be careful about how you transition to a different inventory policy. This also applies to changes in collections, payment cycles, and inventory management that impact cash flow and income. Complete For G. More practice with this type of analysis can help you develop this sometimes-invaluable capability. This is a particularly valuable if you are going to be developing business plans for new services and products in a business, startup of new businesses, etc. C. How much would you have to raise prices to eliminate the cash deficit projected in A? Rerun budget to determine this. (If the answer seems ridiculous, you probably did this right, at least mathematically!) D. Could you eliminate the cash deficit by reducing inventory? What target inventory level would solve the cash deficit problem? (REMEMBER - YOU CANNOT CHANGE HISTORY. New methods of operations can only be changed today and into the future.) E. How much slower would FG have to grow to avoid a cash deficit? (What is FG's Internal sustainable rate of growth?) F. Fun N Games on the Internet: FG can double its sales units if it offers its product for sale on the Internet. The price will be $30 for these Internet units, as there is no retailer between FNG and the customer. The product cost will be $3 more per unit for shipping and special packaging. FG had to purchase equipment costing $25,000 to support this and will have monthly Internet user fees and support costs of $6000. (Higher price on internet sales may well be unrealistic!) If FNG begins this selling program in July, how will this impact cash flow and income? (Don't forget that equipment must be depreciated). How much cash would you seek from an investor based on this information? Could you finance this cash need internally through working capital management? (A typical related question is what cash flow impact would be if launch of new business were delayed by Q months?). G. To quickly build the company size, sell it and take a one-year vacation in Tahiti, you decide to increase sales to 800 units per month. How much cash will be needed, and can this be raised by a combination of faster customer collections, slower vendor payments, negotiating a lower product cost, and reduced inventory levels? Suggest one specific scenario that will finance this growth without borrowing or obtaining equity financing. FEB MAR APRIL MAY JUNE JULY AUGUST SEPT OCT Month JAN INCOME STATEMENT SALES COST OF SALES GROSS MARGIN OTHER EXPENSES INCOME BEFORE TAX INCOME TAX NET INCOME CASH FLOW STATEMENT BEGINNING CASH SOURCES OF CASH COLLECTIONS AIR AVAIL. CASH USES OF CASH ACCTS PAYABLE PAID CASH EXPENSES TOTAL USES ENDING CASH