G-Maker,

HCMG 750 WEEK 4 Case #2:

It appears that there is a mistake with the way you could have calculated this assignment. My instructor simply said that she is giving me a hint with Cash Balance for February (I believe it?s question #3): ?The total should be ($9,250).? Please look at it again and hopefully you could get to the bottom of it. I?m attaching the original from you.

Thanks,

S.R.

Running Head: CASH FLOW WK 4 CASE #2: CASH FLOW EXERCISE By Samsam Siad HCMG 750: FINANCIAL MANAGEMENT IN HEALTH CARE Instructor: Ms. Johnson C. Summer 2016 Davenport University Running Head: CASH FLOW S.Siad 2 Week Four Case #2 - Cash Flow Cash flow exercise Joseph Pharmacy had sales of $25,000 in December and $30,000 in January. The company expects sales of $20,000 in February and $40,000 in both March and April, and $30,000 in May. The company has no other source of cash inflows. Half of the sales are paid for with cash. Twenty-five percent are paid for in each of the two months following the sale. Joseph Pharmacy has the following expenses: (show all of your work) Monthly rent of $1,500 Wages of $5,000 each month Purchases 50% of next month's sales o Cash Outlay 20% in month purchased 80% in following month From the information provided: 1. Calculate the projected Cash Receipts for the three months of February, March, and April (Tables have been set up for you) (30 points) Sales forecast December January February March April Cash Sales 12,500 15,000 10,000 20,000 20,000 Collection of AR: Lagged 1 Month 6,250 7,500 5,000 10,000 Lagged 2 Months 6,250 7,500 5,000 Other Cash Receipts 0 0 0 0 0 Total Cash Receipts 12,500 21,250 23,750 32,500 35,000 Running Head: CASH FLOW S.Siad 3 2. Calculate the projected Cash Disbursements for the same months (40 points) A Schedule of Projected Cash Disbursements for Joseph Pharmacy Sales December January February March April Purchases 15,000 (50% of next month's sales) 10,000 20,000 20,000 15,000 Current month .20 3,000 2,000 4,000 4,000 3,000 Rent payments Wages/Salaries ---------1,500 5,000 12,000 1,500 5,000 8,000 1,500 5,000 16,000 1,500 5,000 16,000 1,500 5,000 Total 9,500 20,500 18,500 26,500 25,500 1 month lag .80 3. Indicate what the total cash balance would be at the end of these three months if the cash balance at the beginning of February was $1,500. (30 points) December January February March April Cash balance Total Cash receipts Cash available Cash Disbursements Balance 4. 1,500 23,750 6,750 32,500 12,750 35,000 25,250 (18,500) 39,250 (26,500) 47,750 (25,500) 6,750 12,750 22,250 Define cash inflows and cash outflows (10 points) Financial statements undoubtedly uncover how an individual organization's financial and economic decisions are reached or decided, whereby, a cash flow statement thus allows what takes place inside a company's operations, sources of its money - cash inflow - and how that money is spent - cash outflows (Nordmeyer, (n.d.)). The importance of reporting net cash flows must clearly be understood. On this note, it is fair to underscore that cash inflows directly refer to all monies received by a company through sales, financing or investment. Cash inflows are used to assess the overall financial strength of a company since a company with a large and Running Head: CASH FLOW S.Siad 4 stable cash inflow is considered to be in a very strong financial position. On the other hand, cash outflows represent all monies in cash that move out of the business due to purchases, repayment of loans and other short term obligations, retirement of bonds and any form of financing such as payment of dividends or for investing purposes. If cash outflows exceed the cash inflows, the company will experience a negative net change in cash (Baker & Baker, 2014, p. 188-189). 5. If I have a budget where expected gross receipts are what is obtained in #1 and my expected cash disbursements are what is obtained in #2. What can you tell me about the cash balance (obtained in #3) if you were doing a variance analysis? (10 points) The net balance of cash calculated in #3 above is increasing from February to April. There is a positive variance in the cash balance at the end of each month, which is increasing over the three months. This therefore implies that the financial position of the company is improving over the three-month period since the cash inflows are also increasing. Hence, the company is performing well as shown by the increase in cash over time. 6. What is a cash budget, a flexible budget, CAPEX, and OPEX? (10 points) A cash budget is a plan or schedule of expected cash receipts and disbursements during a given time period such as a month, a quarter or a year. These cash inflows and outflows are comprised of revenues collected, expenses paid, and loans' receipts and repayments. A cash budget is an estimated projection of the company's cash position in the future. A flexible budget is also referred to as variable budget. It is a financial plan of projected revenues and expenses based on the current actual amount of output or activity. A flexible budget uses revenues and the expenses produced in the current level of business activity as a baseline and estimates how the revenues and expenses will vary based on changes in the level of output. Management usually uses flexible budgets before a given period to predict both a best Running Head: CASH FLOW S.Siad 5 case and worst-case scenario for an upcoming accounting period. This provides a "what if" look and analysis into the future of the company's financial performance (Baker & Baker, 2014. p.181). Capital Expenditure is referred to as CAPEX. These are funds that are used by a company to acquire, purchase or upgrade physical assets of a company such as property, industrial buildings or equipment. Capital expenditure is made by companies to maintain or increase the current level of their operations (Weygandt, Kimmel, & Kieso. 2010. p. 449). These expenditures comprise everything from repairing a roof to building, to purchasing equipment such as truck, or building a brand new factory. When a capital expenditure is made, the cost of that expenditure is usually amortized and spread over the useful life of that asset, which could be 5, 10 or over 20 years (Baker & Baker, 2014. p. 173-174). Operating Expenditure is referred to as OPEX, which are revenue expenses and short-term expenses that are required to meet the current operational costs of running a business, and therefore they are basically similar to operating expenses. They are treated as operating expenses and therefore should be charged to the profit and loss account. Operating expenditure (OpEx) is also viewed as the New Capital expenditure (CapEx). OpEx's flexibility includes the ability to terminate costs at will, which benefits the organization (Weygandt, et al., 2010. p. 215 ). 7. How often do you use some form of budgeting? Why? (10 points) Budgeting is a frequently used in almost all aspects of life that have to do with finance and scarce resources, and the best way to allocate them. This is because budgets acts as guidelines for a given course of action. They explain and articulate the direction of how to achieve a given set of objectives. Furthermore, budgets are tools for planning for future operations and business activities. Budgets can also be used in evaluating performance and help to assess whether the set Running Head: CASH FLOW S.Siad 6 standards have been attained. If there is any deviation between the planned results and actual results, this variance is analyzed and corrective action undertaken (Weygandt, et al., 2010. p. 1019). 8. In the business world we have meetings where the departments who did not meet their monthly forecast come and explain their variances. If this is common practice why is forecasting/budgeting so important? (10 points) Budgeting acts as a benchmark against which the performance of a department or manager is evaluated against a given set criteria or standard. If the set target or standard is not achieved or attained, the possible reason or factor that led to the target not achieved is established and this variance in the results analyzed so that a corrective action can be undertaken to ensure that the set objectives are achieved. The budget is developed within the framework of a sales forecast, which shows the potential sales for the industry and the company's expected shares of such sales (Weygandt, et al., 2010. p. 1020). Therefore, in this case, budgeting is used in evaluating performance and controlling any likely variance or deviation of actual results against set standards and corrective action taken. References Baker, J. J. & Baker, R. W., (2014). Health Care Finance (4th ed.). Basic Tools For Nonfictional Managers. Jones & Bartlett Learning. Nordmeyer, B., (n.d.). Cash Inflows & Outflows of Operations. Retrieved from Chron: Small Business. Baker, J. J. & Baker, R. W., (2014). Health Care Finance (4th ed.). Basic Tools For Nonfictional Managers. Jones & Bartlett Learning. Weygandt, Kimmel, & Kieso. (2010). Accounting Principles. New York, NY: John Wiley & Sons Inc. Sales Purchases (50% of next month sales) December January February March 25,000 30,000 20,000 40,000 15,000 10,000 20,000 20,000 Schedule of Cash Collections: Cash on sales (50%) Cash received from previous month sales (25%) Cash received from previous two month sales (25%) Total estimated cash collections December January February March 12500 15000 10000 20000 6250 7500 5000 6250 7500 23750 32500 Schedule of Cash Disbursements Cash Purchases on month of purchase (20% of month sales) Payment for purchases from previous month (80%) Monthly rent Wages for each month Total estimated cash disbursements December January February March 3000 2000 4000 4000 12000 8000 16000 5000 5000 5000 1500 1500 1500 20500 18500 26500 Cash Budget for February to April Opening Balance Estimated Cash collections from sales Cash from other sources Total Cash available Cash disbursements Ending Cash balance February March April 1500 6750 12750 23750 32500 35000 0 0 0 25250 39250 47750 (18500) (26500) (25500) 6750 12750 22250 April May 40,000 30,000 15,000 April May 20000 15000 10000 10000 5000 10000 35000 35000 April 3000 16000 5000 1500 25500 May 12000 5000 1500 18500 Sheet1 Page 1 Sales Purchases (50% of next month sales) December January February March 25,000 30,000 20,000 40,000 15,000 10,000 20,000 20,000 Schedule of Cash Collections: Cash on sales (50%) Cash received from previous month sales (25%) Cash received from previous two month sales (25%) Total estimated cash collections December January February March 12500 15000 10000 20000 6250 7500 5000 6250 7500 23750 32500 Schedule of Cash Disbursements Cash Purchases on month of purchase (20% of month sales) Payment for purchases from previous month (80%) Monthly rent Wages for each month Total estimated cash disbursements December January February March 3000 2000 4000 4000 12000 8000 16000 5000 5000 5000 1500 1500 1500 20500 18500 26500 Cash Budget for February to April Opening Balance Estimated Cash collections from sales Cash from other sources Total Cash available Cash disbursements Ending Cash balance February March April 1500 6750 12750 23750 32500 35000 0 0 0 25250 39250 47750 (18500) (26500) (25500) 6750 12750 22250 April May 40,000 30,000 15,000 April May 20000 15000 10000 10000 5000 10000 35000 35000 April 3000 16000 5000 1500 25500 May 12000 5000 1500 18500