5 6 4 7 9 8 2 3 10 11 1 WORKSHEET: DESIGNS BY DEZINE 20yx CASH BUDGET (IN $000s) April May June Jul 14 15 16 17 Beginning Cash 6 Receipts 18 Total Cash Avail. Materials purchases Labor (non-S, G, & A) Net capital expend. 12 Distributions or S, G, & A ex- penses Owner's salary Interest expense Total 13 Total cash paid out disbursements Loan principal paid div. Net cash position Minimum cash S-T loan required Cumulative loan req. Jan Feb Mar proiections. 24 8 7 4 5 1 25 1 2 0 28 (4) 5 9 9 20 Aug Sep Oct Nov Dec EXERCISE 2 This exercise allows you to test your understanding of considerations for reviewing the Beginning cash-On Designs by Dezine's 20xz income tax return, cash at year-end was $6,053. The business banker enters this amount on Line 1 as beginning cash. Line 15 on the cash budget shows the minimum cash balance required for ongoing operations as $5,000. If cash is higher than $5,000 at the d of any month, it is because all short-term debt (shown as loan required on Line 16, with a cumulative balance on Line 17) has been repaid. 9 6 7 8 14 15 5 11 4 FIGURE 11.3 DESIGNS BY DEZINE 20yx CASH BUDGET ($ IN 000s) May June Jul 5 5 5 1 2 3 Beginning Cash Receipts Total Cash Avail. Materials purchases Labor (non-S, G, &A) S, G, & A ex- penses Owner's salary Interest expense disbursements 10 Loan principal paid Total Net capital expend. 12 Distributions or div. 13 Total cash paid out 16 S-T loan required 17 Cumulative loan req. 5 9 9 0 Net cash position (4) Minimum cash 1 1 5 2 28 4 25 Jan 6 18 24 8 7 6 290 Analyzing Financial Statem 2 0 0 15 5 1 4 31 (1) 5 29 Feb 5 8 25 30 11 0 2 5 3 0 1 2 38 18 5 Mar 5 35 40 4 36 12 14 4 1 0 5 0 2 46 1 19 April 5 45 4 5 50 44 16 18 0 7 0 5 2 60 20 21 4 5 1 55 51 53 17 (2) 8 5 21 4 2 0 65 24 5 1 0 60 55 57 14 (3) 60 24 21 65 4 5 5 1 55 0 0 8 2 57 11 (3) Aug 5 65 70 24 25 4 5 1 59 2 9 5 7 0 0 61 (4) Sep 5 75 80 28 4 5 1 28 32 66 2 0 0 68 5 0 Oct 5 (7) 85 90 32 4 5 1 74 2 0 12 14 0 76 14 0 0 Nov 14 100 114 36 39 4 5 1 85 2 0 0 87 Dec 27 70 0 97 44 11 4 5 1 65 2 0 15 82 27 15 27 15 0 0 0 Receipts-As summarized in monthly sales chart above, Designs by Dezine projects a sales increase for 20yx. The growth is from one full year of operations and projected larger contracts. The company is somewhat seasonal, with large sales levels in the summer and fall. As a construction company, Designs by Dezine obtains a 50 percent down payment with each contract. Most contracts are completed in 30 to 45 days. The remaining 50 percent is collected on com pletion. The company ended 20xz with $8,000 of accounts receivable. The first month's receipts would include $10,000 of down payments for the projected January sales. Therefore, the receipts are $18,000 ($8,000 accounts receivable collections and $10,000 down payments). Thus, Line 2 reflects the accounts receivable collections and sales down payments, totaling $18,000. Total cash available-Total cash receipts on Line 3 equal the following items: o $24,000 for January ($6,000 cash, $8,000 accounts receivable collections, and $10,000 down payment of projected January sales) Feb 308,000 for February ($10,000 collected on the balance of January sales, 50 percent down on projected February sales $12,000, plus beginning cash $5,000) 40000 15000 $5,000) o $38,000 for March ($13,000 collected on the balance of February sales, 50 percent down on projected March sales $20,000, plus beginning cash of o Additional months thereafter, as shown in the chart above (receipts from down payments and the balance of sales from the previous month, plus beginning cash or excess net cash position) 100 Total cash paid out-The cash-paid-out figures typically are estimated expendi- tures, using expenses as a percentage of sales, which is calculated from the compa- ny's previous income statement. The business banker might wish to discuss with the borrower what effect the new equipment and projected sales growth will have on the company's financial performance. Moreover, the business banker should analyze the expense categories to determine which of them are fixed and might remain stable in the face of growing sales. Cash budget expenditures might also be based on company-provided estimates of proposed expenditures. Materials purchases and labor-Because the analysis shows growing sales for Designs by Dezine, it is logical for the business banker to assume that many of the company's costs will grow at a similar rate. The next step is to calculate materials purchases and labor expenses. Designs by Dezine's material expenses were 85.9 percent of sales last year. This amount also includes labor for each job. The company is projecting 75 percent of sales for materials and labor expenses. After a discussion with the owners, the business banker calculates the amount of materials costs at 40 percent and labor costs at 35 percent. When creating a cash budget, a business banker must take into account the actual timing of a company's accounts payable for raw materials or inventory payments. Designs by Dezine's accounts payable for materials are paid 30 days after the start of a job. Generally, raw materials are delivered early in the job, with payment due 30 days after receipt of the raw materials. Therefore, January material purchases are $8,000 (December sales of $20,000 x 0.40 = $8,000), and labor expenses are $7,000 (projected sales of $20,000 x 0.35 = $7,000). February materials purchases are $8,000 (January projected sales of $20,000 x 0.40 = $8,000), and labor expenses are $11,000 (February projected sales of $30,000 x 0.35 = $10,500 rounded to $11,000). For each month following, materials purchases will continue to be 40 percent of the previous month's sales and labor will be 35 percent of the current month's sales. Selling, general, and administrative (S, G, & A) expenditures-An income statement often lists the individual expense categories that make up its S, G, & A expenses, including office employees' salaries, office supplies, advertising, portation, accounting, and so on. These expenditures support sales and p are incurred in the same month as the sales and are paid for in that same month It is not necessary to expect these expenditures s to take place in advance of the sales percent are anticipated. For 20xz, Designs by Dezine's S, G & A expenses were 5.7 date. S, G, & A expenses are calculated as a percentage of sales if no major changes of sales; however, this number is distorted because 20xz was a partial year, and banker determines that this amount is reasonable. Therefore, the cash budget uses expenses of $46,000 for 20yx. After discussing this with the owner, the business sales are projected to increase substantially. The company is projecting S, G&A $42,700 for eight months. She is expecting to draw up to $80,000 this y Owner's salary-Last year, Linda Dezine drew an officer's compensation of if the company's performance allows. However, she has agreed to limit her $4,000 per month on Line 6. salary to $5,000 each month une 7 be company can afford to to year The $5,000 draw is listed on Line 7 of the projected cash budget. Because the cash budget shows excess cash in November and December, she may choose to increase her salary during those months. Interest expense-The new loan for $8,000 and a shareholder loan taken o late last year will increase interest expense and the cash flow required for prin- cipal repayment compared with 20xz. Assuming that the interest rate will beg percent, the new interest expense would be about $546 for the first year of the schedule). The amount of the shareholder loan is obtained from the c computer loan, with payments starting in February (based on an amortization tax return ($46,172 at 12/31/20xz). If $1,000 principal reductions are made beginning in February, total interest expense for the 20yx will be about $3,743. The remaining debt is a loan for vehicles (trucks), shown as a $40,064 balance at 12/31/20xz. The loans started at $43,000 at 8 percent, with payments of 20yx should be about $2,880. $872 over 60 months. Based on an amortization schedule, interest paid in For cash budget purposes, the interest on the existing loans (vehicles and share- holder) is added together and divided by 12. This results in $552 of monthly interest for all 12 months. The interest on the computer loan is about $50 per month, beginning in February. Because the cash budget is presented in even thousands, the business banker will round the monthly amount up to $1,000 for the cash budget. Total disbursements-The sum of Lines 4 through 8 equals total disburse ments on Line 9. This sum should total the cash expenditures for cost of goods sold; selling, general, and administrative expenses; and interest expense. by Dezine's balance sheet shows long-term debt of $40,064 for vehicles and Loan principal-As mentioned in the interest expense calculations, Designs om a $46,172 shareholder loan at 12/31/20xz. Using an amortization sche ule, the 20xz principal reduction for the vehicles loan will be about $7,582 (The loan started at $43,000 at 8 percent for payments of $872 over 60 months. Six payments had been made during 20xz.) For cash budgeting, this amount will be divided by 12, resulting in $632 per month. This will be rounded up to $1,000 for January. Starting in February, the company is hoping to begin repaying shareholders $1,000 per month on the principal portion of the debt. Also in February, payments will begin on the $8,000 computer loan. Using an 8 percent interest rate and payments of $162 over 60 months, the principal reduction during 20yx (11 months) would be about $1,238, or $112 per month. So, principal reductions in February and the following months will include an additional $1,112. Together with the $632 per month for the vehicles loan, total monthly principal reduction is about $1,744, which will be rounded to $2,000. Net capital expenditures-Computer equipment is the company's only pro- jected capital equipment purchase for 20yx. The amount on Line 11 is shown net of any long-term financing, which is expected to be $8,000. This leaves $2,000 as the net capital expenditure for cash budget purposes. The business banker will need to adjust this amount if the loan is not approved or is ob- tained for a different dollar amount. Income taxes and dividends-Income taxes sometimes can be a problem for businesses preparing cash budgets. Designs by Dezine is an S corporation, with Linda Dezine as the sole owner and personally liable for any taxable income. Therefore, the company will show no taxes paid. However, most S corporations make a distribution to the owner to fund any income taxes on the business income that is passed through to the owner's personal tax return. Because the showed an operating loss last year (20xz), the amount of the dis- company tribution for this year (20yx) needs to be based on projected earnings. Linda Dezine is projecting a $45,000 profit for 20yx, so a distribution of $15,000 is projected for December. MAISH Total cash paid out-The business banker has now accounted for all of the anticipated cash expenditures for each month for Designs by Dezine. The com- pany's projected total cash outlays are listed for each month on Line 13. Net cash position-This line of the cash budget is calculated by subtracting total cash paid out (Line 13) from total cash available (Line 3). It shows that Designs by Dezine's net cash position does not exceed its minimum cash re- quired (Line 15) until May. needs to Short-term loan required-This is the amount of cash the company maintain its stated minimum cash position of $5,000. The amount of a loan required is calculated by subtracting the company's net cash position (Line 14) from its minimum cash requirement (Line 15). From January through April, the company needs additional short-term borrowings to maintain its cash position. In January the net cash position is ($4000), so $9,000 must be borrowed to end up with a positive minimum cash position of $5,000. In February the net Co cash position of $5,000. Starting in May, the net cash position exceeds the min- cash position is ($1,000), so $6,000 must be borrowed to reach the minimum the amount of cash (above the minimum level) that can be used to pay down imum cash level, so new borrowings are required. The negative numbers show short-term loans. Cumulative loan required-This is the running balance of the short-term borrowing needed to maintain the company's minimum cash position. In Jan- po- uary $9,000 must be borrowed to end up with a positive minimum cash sition of $5,000, leaving a cumulative loan balance of $9,000. In February another $6,000 must be borrowed to reach the minimum cash position of $5,000, leaving a cumulative loan balance of $15,000. Monthly borrowings occur through April, with the cumulative balance reaching a peak of $19,000 in that same month. In May, the net cash position is $7,000, so $2,000 of the loan can be repaid. In June the net cash position is $8,000, so $3,000 of the loan can be repaid. Through September, loan repayments of $19,000 will have been made, totally repaying any short-term borrowings. Cash balances begin to build from Octo- ber to December. WORKSHEET: DESIGNS BY DEZINE 20yx CASH BUDGET (IN $000s) Feb Mar April May June Jul Aug Jan Sep 5 5 5 5 5 5 5 55 30 40 45 50 55 60 70 75 85 1 2 3 4 5 9 7 8 6 10 11 12 14 15 Beginning Cash Receipts 17 Materials purchases Total Cash Avail. 24 Labor (non-S, G, & A) Total disbursements S, G, & A ex- penses Owner's salary 1 Interest expense Net capital expend. Distributions or 9 div. 18 24 35 45 50 55 60 65 75 80 90 8 8 8 16 18 22 26 30 32 36 11 14 16 20 23 27 29 32 16 S-T loan required 7 Loan principal 1 paid Cumulative loan req. 4 5 13 Total cash paid 28 out 25 0 Net cash position (4) Minimum cash 5 6 L 6 4 4 4 5 5 5 - - 2 000 0 0 0 0 10 10 10 100 100 0 4 4 44 4 4 4 4 4 5 5 5 5 5 5 5 5 5 ||||| 1 | || Oct Nov 1 25 29 40 44 52 59 67 71 168 2 2 2 2 2 2 2 2 2 2 2 Dec 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 27 31 42 46 61 69 73 171 5 16 5 6 3 1 3 4 83 555 5 5 55 555 5 0 411) 0 (1) 2421 15 18 19 18 40 previou mor Instructions Based on the information in the chapter on Cash Budgets and Pro Forma 135 previoy mor lou snot go EXERCISE 2 This exercise allows you to test your understanding of considerations for reviewing projections.