I need to understand how we solve part e. in excel
e. If its customers began to pay late, this would slow down collections and thus increase the required loan amount. Also, if sales dropped off, this would have an effect on the required loan. Do a sensitivity analysis that shows the effects of these two factors on the max loan requirement. Assume the purchases of labor and raw material also vary by the sales adjustment factor. Answer: The "Sales adjustment factor" can be used to cause sales to vary from the base levels. Similarly, we can change the percentage of late paying customers. Here is the relevant data table: Change Maximum Loan Required in Sales % Collections in 2nd month $49,000 0% 20% 30% 45% 60% 75% 15% 90% -100% $ 242,000 $ 242,000 $ 242,000 $ 242,000 $ 242,000 $242,000 -75% $ 193,000 $ 193,000 $ 193,000 $ 193,000 $ 193,000 $ 193,000 $ 193,000 -50% $ 144,000 $ 144,000 $ 144,000 $ 144,000 $ 144,000 $ 144,000 $144,000 -25% $ 95,000 | $ 95,000 1 $ 95,000 $ 95,000 $ 95,000 $ 96,500 $ 101,000 0% $ 46,000 $ 49,000 $53,000 $59,000 $ 65,000 $ 71,000 $77,000 25% 50% $ 19,750 $ 7,750 $1,750 $ 7,250 $ 30,750 $ 46,500 75% $ 23,375 $ 9,375 $ 2,375 $ 8,125 $ 31,875 $50,250 100% $ 27,000 $11,000 -$ 3,000 $ 9,000 $ 33,000 $54,000 You can see from the table that, from the base case (collections = 20%, change in sales = 0%), an increase in late payers increases the loan requirement. The pattern is mixed for the change in sales. As sales increase, the maximum loan amount increases, to support the higher level of sales. As sales decrease, the maximum amount gradually decreases. However, at very low levels of sales, the loan amount increases since more cash is needed to cover the "fixed costs, such as lease payments and administrative salaries. Rusty Spears, CEO of Rusty's Renovations, a custom building and repair company, is preparing documentation for a line of credit request from his commercial banker. Among the required documents is a detailed sales forecast for parts of 2014 and 2015. Estimates obtained from the credit and collection department are as follows: collections within the month of sale, 15%; collections during the month following the sale, 65%; collections the second month following the sale, 20%. Payments for labor and raw materials are typically made during the month following the one in which these costs were incurred. Total costs for labor and raw materials are estimated for each month as shown in General and administrative salaries will amount to approximately $15,000 a month; lease payments under long- term lease contracts will be $5,000 a month; depreciation charges will be $7,500 a month; miscellaneous expenses will be $2,000 a month; income tax payments of $25,000 will be due in both September and December; and a progress payment of $80,000 on a new office suite must be paid in October. Cash on hand on July 1 will amount to $60,000, and a minimum cash balance of $40,000 will be maintained throughout the cash Input Data Collections during month of sale Collections during month after sale Collections during second month after sale Lease payments Target cash balance General and administrative salaries Depreciation charges Income tax payments (Sep & Dec) Miscellaneous expenses New office suite payment (Oct) Cash on hand July 1 15% 65% 20% $5,000 $40,000 $15,000 $7,500 $25,000 $2,000 $80,000 $60,000 Note: When the percent collected during the second month after sale is changed, the percent for collections during month after sale is automatically changed so that 100% of sales are collected during the three-month period. Sales, labor, and RM adjustment factor 0% a. Prepare a monthly cash budget for the last six months of the year. Original sales estimates Original labor and raw mat. estimates May $60,000 $75,000 June $100,000 $90,000 July $130,000 $95,000 August September October November December January $120,000 $100,000 $80,000 $60,000 $40,000 $30,000 $70,000 $60,000 $50,000 $20,000 $20,000 $60,000 $100,000 $130,000 $120,000 $100,000 $80,000 $60,000 $40,000 $30,000 Forecasted Sales Sales (gross) Collections During month of sale During 1st month after sale During 2nd month after sale Total collections $19,500 $65,000 $12,000 $96,500 $18,000 $84,500 $20,000 $122,500 $15,000 $78,000 $26,000 $119,000 $12,000 $65,000 $24,000 $101,000 $9,000 $52,000 $20,000 $81,000 $6,000 $39,000 $16,000 $61,000 Purchases Labor and raw materials Payments for labor and raw materials $75,000 $90,000 $95,000 $90,000 $70,000 $95,000 $60,000 $70,000 $50,000 $60,000 $20,000 $50,000 $20,000 $20,000 Payments Payments for labor and raw materials General and administrative salaries Lease payments Miscellaneous expenses Income tax payments Design studio payment Total payments 90,000 15,000 5,000 2,000 95,000 15,000 5,000 2,000 70,000 15.000 5,000 2,000 25,000 60,000 15,000 5,000 2,000 50,000 15,000 5,000 2,000 20,000 15,000 5,000 2,000 25,000 $112,000 117,000 $117,000 80,000 $162,000 72,000 $67,000 Net Cash Flows Cash on hand at start of forecast period Net cash flow (NCF): Total collections - Total payments Cumulative NCF: Prior month cumulative + this month's NCF $60,000 ($15,500) $44,500 $5,500 $50,000 $2,000 $52,000 ($61,000) ($9,000) $9,000 ($0) ($6,000) ($6,000) Cash Surplus (or Loan Requirement) Target cash balance Surplus cash or loan needed: Cum NCF - Target cash $40,000 $4,500 40,000 $10,000 40,000 $12,000 40,000 40,000 $40,000 ($49,000) ($40,000) ($46,000) Max. Loan $49,000 e. If its customers began to pay late, this would slow down collections and thus increase the required loan amount. Also, if sales dropped off, this would have an effect on the required loan. Do a sensitivity analysis that shows the effects of these two factors on the max loan requirement. Assume the purchases of labor and raw material also vary by the sales adjustment factor. Answer: The "Sales adjustment factor" can be used to cause sales to vary from the base levels. Similarly, we can change the percentage of late paying customers. Here is the relevant data table: Change Maximum Loan Required in Sales % Collections in 2nd month $49,000 0% 20% 30% 45% 60% 75% 15% 90% -100% $ 242,000 $ 242,000 $ 242,000 $ 242,000 $ 242,000 $242,000 -75% $ 193,000 $ 193,000 $ 193,000 $ 193,000 $ 193,000 $ 193,000 $ 193,000 -50% $ 144,000 $ 144,000 $ 144,000 $ 144,000 $ 144,000 $ 144,000 $144,000 -25% $ 95,000 | $ 95,000 1 $ 95,000 $ 95,000 $ 95,000 $ 96,500 $ 101,000 0% $ 46,000 $ 49,000 $53,000 $59,000 $ 65,000 $ 71,000 $77,000 25% 50% $ 19,750 $ 7,750 $1,750 $ 7,250 $ 30,750 $ 46,500 75% $ 23,375 $ 9,375 $ 2,375 $ 8,125 $ 31,875 $50,250 100% $ 27,000 $11,000 -$ 3,000 $ 9,000 $ 33,000 $54,000 You can see from the table that, from the base case (collections = 20%, change in sales = 0%), an increase in late payers increases the loan requirement. The pattern is mixed for the change in sales. As sales increase, the maximum loan amount increases, to support the higher level of sales. As sales decrease, the maximum amount gradually decreases. However, at very low levels of sales, the loan amount increases since more cash is needed to cover the "fixed costs, such as lease payments and administrative salaries. Rusty Spears, CEO of Rusty's Renovations, a custom building and repair company, is preparing documentation for a line of credit request from his commercial banker. Among the required documents is a detailed sales forecast for parts of 2014 and 2015. Estimates obtained from the credit and collection department are as follows: collections within the month of sale, 15%; collections during the month following the sale, 65%; collections the second month following the sale, 20%. Payments for labor and raw materials are typically made during the month following the one in which these costs were incurred. Total costs for labor and raw materials are estimated for each month as shown in General and administrative salaries will amount to approximately $15,000 a month; lease payments under long- term lease contracts will be $5,000 a month; depreciation charges will be $7,500 a month; miscellaneous expenses will be $2,000 a month; income tax payments of $25,000 will be due in both September and December; and a progress payment of $80,000 on a new office suite must be paid in October. Cash on hand on July 1 will amount to $60,000, and a minimum cash balance of $40,000 will be maintained throughout the cash Input Data Collections during month of sale Collections during month after sale Collections during second month after sale Lease payments Target cash balance General and administrative salaries Depreciation charges Income tax payments (Sep & Dec) Miscellaneous expenses New office suite payment (Oct) Cash on hand July 1 15% 65% 20% $5,000 $40,000 $15,000 $7,500 $25,000 $2,000 $80,000 $60,000 Note: When the percent collected during the second month after sale is changed, the percent for collections during month after sale is automatically changed so that 100% of sales are collected during the three-month period. Sales, labor, and RM adjustment factor 0% a. Prepare a monthly cash budget for the last six months of the year. Original sales estimates Original labor and raw mat. estimates May $60,000 $75,000 June $100,000 $90,000 July $130,000 $95,000 August September October November December January $120,000 $100,000 $80,000 $60,000 $40,000 $30,000 $70,000 $60,000 $50,000 $20,000 $20,000 $60,000 $100,000 $130,000 $120,000 $100,000 $80,000 $60,000 $40,000 $30,000 Forecasted Sales Sales (gross) Collections During month of sale During 1st month after sale During 2nd month after sale Total collections $19,500 $65,000 $12,000 $96,500 $18,000 $84,500 $20,000 $122,500 $15,000 $78,000 $26,000 $119,000 $12,000 $65,000 $24,000 $101,000 $9,000 $52,000 $20,000 $81,000 $6,000 $39,000 $16,000 $61,000 Purchases Labor and raw materials Payments for labor and raw materials $75,000 $90,000 $95,000 $90,000 $70,000 $95,000 $60,000 $70,000 $50,000 $60,000 $20,000 $50,000 $20,000 $20,000 Payments Payments for labor and raw materials General and administrative salaries Lease payments Miscellaneous expenses Income tax payments Design studio payment Total payments 90,000 15,000 5,000 2,000 95,000 15,000 5,000 2,000 70,000 15.000 5,000 2,000 25,000 60,000 15,000 5,000 2,000 50,000 15,000 5,000 2,000 20,000 15,000 5,000 2,000 25,000 $112,000 117,000 $117,000 80,000 $162,000 72,000 $67,000 Net Cash Flows Cash on hand at start of forecast period Net cash flow (NCF): Total collections - Total payments Cumulative NCF: Prior month cumulative + this month's NCF $60,000 ($15,500) $44,500 $5,500 $50,000 $2,000 $52,000 ($61,000) ($9,000) $9,000 ($0) ($6,000) ($6,000) Cash Surplus (or Loan Requirement) Target cash balance Surplus cash or loan needed: Cum NCF - Target cash $40,000 $4,500 40,000 $10,000 40,000 $12,000 40,000 40,000 $40,000 ($49,000) ($40,000) ($46,000) Max. Loan $49,000
