Bluffton PharmacyPart 2

How Should the Owners of a Small Pharmacy Create a Cash Flow Forecast for Their Business?

It has been a little more than two years since Angela Crawford and Martin Rodriguez purchased the Bluffton Pharmacy from Frank White, the previous owner and founder, who had started the pharmacy in 1969. Although Crawford and Rodriguez have prepared budgets for Bluffton Pharmacy and have analyzed their financial statements using ratio analysis, they have not created a cash flow forecast. During a recent meeting, their banker explained the importance of a reliable cash flow forecast, telling them that banks traditionally are cash flow lenders. Bankers appreciate strong balance sheets and income statements, but they are most interested in a companys cash flow because they know that positive cash flow is required to repay a loan.

Crawford and Rodriguez expect sales to increase 4.5 percent next year to $2,504,368. Credit sales account for 79 percent of total sales, and the companys collection pattern for credit sales is 11 percent in the same month in which the sale is generated, 63.5 percent in the first month after the sale is generated, and 22 percent in the second month after the sale is generated. The pharmacys cost of goods sold is 77.4 percent, and vendors grant net 30 credit terms, which means that the pharmacy pays for the goods it purchases every month in the following month. Crawford and Rodriguez have been working with their accountant to develop the following estimates for their sales and expenses for the upcoming year:

Actual sales for the last two months, November and December, were $272,357 and $315,458. The companys cash balance as of January 1 is $74,473. The interest rate on Bluffton Pharmacys current line of credit is 8.25 percent, and whatever the pharmacy borrows must be repaid the following month (with interest), even if it must borrow again in that month. The entrepreneurs have established a minimum cash balance of $15,000.

Questions

1. C7-1. Develop a monthly cash budget for Bluffton Pharmacy for the upcoming year.

2. C7-2. What recommendations can you offer Angela Crawford and Martin Rodriguez to improve their pharmacys cash flow?

764 - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Sales $230,402 $237,915 $215,376 $177,810 $175,306 $172,801 $162,784 $167.793 $197.845 $247,932 $255,445 $262.959 Other cash 105 55 60 75 85 55 65 60 65 85 95 110 receipts Rent 3,083 3,083 3,083 3,083 3,083 3,083 3,083 3,083 3,083 3,083 3,083 3,083 Utilities 1049 1083 980 809 798 787 741 901 1.129 1.163 1,197 Advertising 1.150 1.188 1,075 888 875 863 813 838 988 1.238 1,275 1,313 Insurance 2,700 2.700 2,700 2,700 Salaries, 27,404 27,515 27,182 26,627 26,590 26,553 26,405 26,479 26,923 27,663 27,774 27,885 Wages, and benefits Computer 1042 1,042 1,042 1,042 1,042 1,042 1,042 1,042 1,042 1,042 1,042 1,042 system and E- commerce Repairs and 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 maintenanc e 150 5,000 200 3,900 Travel Professional fees Supplies 644 Loan 2,073 payments Other 50 469 665 2,073 602 2,073 497 2,073 490 2,073 483 2,073 455 2,073 553 2,073 693 2,073 714 2,073 735 2,073 2,073 50 50 40 40 40 40 45 50 50 50 50 764 - Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Sales $230,402 $237,915 $215,376 $177,810 $175,306 $172,801 $162,784 $167.793 $197.845 $247,932 $255,445 $262.959 Other cash 105 55 60 75 85 55 65 60 65 85 95 110 receipts Rent 3,083 3,083 3,083 3,083 3,083 3,083 3,083 3,083 3,083 3,083 3,083 3,083 Utilities 1049 1083 980 809 798 787 741 901 1.129 1.163 1,197 Advertising 1.150 1.188 1,075 888 875 863 813 838 988 1.238 1,275 1,313 Insurance 2,700 2.700 2,700 2,700 Salaries, 27,404 27,515 27,182 26,627 26,590 26,553 26,405 26,479 26,923 27,663 27,774 27,885 Wages, and benefits Computer 1042 1,042 1,042 1,042 1,042 1,042 1,042 1,042 1,042 1,042 1,042 1,042 system and E- commerce Repairs and 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 2,000 maintenanc e 150 5,000 200 3,900 Travel Professional fees Supplies 644 Loan 2,073 payments Other 50 469 665 2,073 602 2,073 497 2,073 490 2,073 483 2,073 455 2,073 553 2,073 693 2,073 714 2,073 735 2,073 2,073 50 50 40 40 40 40 45 50 50 50 50