Rusty Spears, CEO of Rustys 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 for the next two years.

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 the table.

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 budget period.

Input DAER 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 parent collected during the second month after sale is changed, che percent for colletions during month after sale in 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 July August $100,000 $130,000 $120,000 $90,000 $95,000 $70,000 September October November December January $100.000 $80,000 $60.000 $60.000 $40,000 $30,000 $60,000 $50,000 $50,000 $20,000 $20,000 $20,000 Forecasted Sales Sales (groba! $60,000 $100,000 $130,000 $120,000 $100,000 $80,000 $60,000 $40,000 $30,000 9000 Collections During month of sale During 1st month after sale During 2 month after sale Total collections 15000 85000 19500 18000 84500 78000 12000 20000 $116,000 $116,000 15000 12000 9000 6000 65000 52000 39000 26000 26000 24000 20000 16000 $106.000 $88,000 $68,000 $48,000 $ $ Purchases Labor and raw materials Payments for labor and raw materials $75,000 $90,000 $95,000 $70,000 $75,000 $90,000 $95,000 $60.000 $50,000 $ $70.000 $60,000 $20.000 $20,000 $50,000 $20,000 Payments Payments for labor and raw materials General and administrative salaries Lease payments Miscellaneous expenses Income tax payments Design studio payment Total navmonte 90.000 15,000 5,000 2,000 95,000 15,000 5,000 2,000 70,000 60,000 50,000 20,000 15,000 15,000 15,000 15,000 5,000 . 5,000 5,000 5,000 2,000 2,000 2,000 2,000 25,000 25.000 80,000 $117 ono $162 non $77 on Synnn $67 on ***** 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 560,000 $4.000 (51,000 ) $ $64,000 $63,000 ($11,000) ($74,000) ($4,000) ($19,000) 552,000 (522,000) ($26,000) ($45.000) Cash Surplus for Loon Requirement Target cash balance Surplus cash or loan needed: Cum NCF - Target cash $40,000 $40,000 $ $ $24.000 $23,000 $ $40,000 $40,000 $40,000 $40,000 $12,000 ($62,000) ($66,000) ($85,000) Max. Loan $85,000 b. How much must Spears borrow each month to maintain the target cash balance? The cash budget symbolizes a surplus available during July, August, and September. The company will need to borrow $62,000.00 to stick to the target cash balance during September. Further, the company will need to get a loan equal to $66,000.00 in September, and a maximum loan in October equals $85,000.00 to advance the objective cash balance. c. Would the cash budget be accurate if inflows came in all during the month but outflows were bunched early in the month? No. There would be a significant cash shortfall. Only a little of the cash would have come in in the first month by the 3rd and 4th, but all payments would have to be made. There is a request to provide a daily cash budget to resolve the problem. d. If the company operates on a seasonal basis, how would this affect the current ratio and the debt ratio? The company would have some current assets before the busy season, but not very much, and it should have very little debt Therefore, its current ratio should be high and its debt ratio low. Then, as it goes into total production, it will have to obtain working capital and borrow. Current assets will rise, but so will debt. This will lower the current ratio and raise the debt ratio. Although the company will attend more genuineness at certain times of the year than at others, lenders will recognize that the business is seasonal and consider when judging it. 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. Change in Sales Muximum Luan Required %. Collections in and month 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. 20% 75% 90% Change in Sales $85,000 -100% -75% -50% -25% 0% 25% 50% 75% 100% 0% $ 157,000 $ 142,000 $ 127,000 $ 112,000 Maximum Loan Required % Collections in 2nd month 30% 35% 50% $ 290,500 $312,750 $ 379,500 $ 271,000 $ 292,500 $ 357,000 $ 251,500 $ 272,250 $ 334,500 $ 232,000 $ 252,000 $ 312,000 $ 212,500 $ 231,750 $ 289,500 $ 193,000 $ 211,500 $ 267,000 $ 173,500 $191,250 $ 244,500 $ 154,000 $ 171,000 $ 222,000 $ 154,500 $ 167,250 $ 205,500 $ 246,000 $ 228,000 $ 210,000 $ 192,000 $ 174,000 $ 156,000 $ 138,000 $ 127,000 $ 129,000 $ 490,750 $ 464,500 $ 438,250 $ 412,000 $385,750 $ 557,500 $ 529,000 $ 500,500 $ 472,000 $ 443,500 $ 97,000 $ 82,000 $ 68,000 $ 73,000 $78,000 $ 359,500 $ 333,250 $ 307,000 $ 280,750 $ 415,000 $ 386,500 $ 358,000 $ 329,500 Due to the constructed two-variables data table, from the base case (collections = 20%, change in sales = 0), late payers' improvement extends the necessary loan. The model is mixed for the shift in sales. As sales progress, the maximum loan amount increases to promote a higher level of commerce. On the other hand, as sales drop, the total amount gradually diminishes. Notwithstanding, the loan amount increases at shallow trade levels since more cash is needed to satisfy the "fixed" expenses, such as lease payments and administrative salaries