Your family business is expanding. Based on your experience and in-depth knowledge of the market, you have estimated the following results for the first 2 years (8 quarters) of the project.

Expected revenues for the first two years are as follows.

In addition, sales for the 1st quarter of Year 3 are projected at $370,000.

Year 1 (000s)

Q1 Q2 Q3 Q4

10 20 40 70

Year 2 (000s)

Q1 Q2 Q3 Q4

110 160 220 290

General and administrative expenses (wages, taxes, office etc.) are estimated to be 15% of sales.

Sales salaries and commissions are estimated to be 12% of sales.

Accounts receivable at the beginning of this expansion are $0.

Collection period = 30 days

Accounts payable at the beginning of the expansion are $0.

The Company quarterly purchases from suppliers = 40% of the next quarters forecasted sales.

Suppliers are paid on average in 45 days.

You will need to buy new equipment & furniture in both Year 1 Q1 and Q3 for $25,000 ($50,000 total in Year 1).

To help start the expansion you have secured an initial cash loan from the bank of $50,000. Interest on this loan is $1,500 per quarter. The company will pay back the full $50,000 in the Year 2 Q4.

Interest on any additional short-term borrowing is expected to be 2% per quarter. The company required return must be at least this each quarter.

The Company wishes to always maintain a $50,000 minimum balance to best manage its working capital and any unexpected commitments.

Question:

1.Based on the information above build a Cash Budget for the expansion. Use Appendix A

2. From above, does the company require any short-term financing? Explain.

a. If so, use the template in Appendix B to build a Short-Term Financing Plan.

Appendix A Cash Budget

Year 1 (000s)

Q1 Q2 Q3 Q4

Year 2 (000s)

Q1 Q2 Q3 Q4

Cash Collections

Beginning A/R

Sales

Cash (A/R) Collections

Ending A/R

Cash Disbursements

Beginning A/P

Purchases

Paid A/P

Ending A/P

Total Cash Outflows

Paid A/P

General & admin. expenses

Sales salaries & commissions

Capital expenditures

Loan Repayment

Loan Interest

Total cash disbursements

Net Cash Flows

Beginning cash balance

Total cash (A/R) collections

Total cash disbursements

Net cash inflow

Ending cash balance

Minimum cash balance

Cumulative surplus (deficit)

Appendix B - Short-Term Financing Plan

Year 1 (000s)

Q1 Q2 Q3 Q4

Year 2 (000s)

Q1 Q2 Q3 Q4

Beginning cash balance

Net cash flow Ending

Cash Balance (before borrowing or repayment)

Interest on exiting short-term borrowing

New required short-term borrowing

Short-term borrowing repaid

Ending Cash Balance (after borrowing or repayment)

Minimum cash balance

Cumulative surplus (deficit)

Beginning short-term debt

Change in short-term debt

Ending short-term debt