FIN 370 Week 5 Precision Machines Financial Statements solution

Precision Machines

Read the following case study:

Precision Machines is preparing a financial plan for the next six months to determine the financial needs of the company. The historical analysis of the company’s sales shows that the company’s total sales are 30% cash sales and 70% credit sales.  Further analysis of credit sales shows that the company receives 50% of the credit sales one month after the sale and the remaining 50% in the second month after the sale. This means the cash collections from sales are 30% in the first month of the sale, 35% in the second month, and 35% in the third month. 

The materials purchased by the company amounts to 50% of the sales for the month.  The company pays for the purchases one month after the initial purchase. The company likes to maintain a cash balance of $5,000. The cost of borrowing is 10%.  The company plans to pay off the loan whenever there is a surplus and borrow when there is a deficit. 

The attached spreadsheet shows revenues (sales), expenses, capital expenditures, and other expenses for Precision Machines’ next six months.  Using the information given on the spreadsheet, prepare a cash budget for January through June and determine the cash surplus, deficit, and the financing needs of the company.  Write a 300-word essay recommending a cash management strategy for the company that will minimize the financing cost and increase the cash flows for the company.

Precision Machines                                   
                                   
Data:                                   
         November    December    January    February    March    April    May    June
Cost of borrowing    10.00%                                 
Minimum Cash Balance    $5.000                               
Beginning Cash Balance    $7.500                               
Revenues (Sales)        $40.000    $50.000    $48.000    $55.000    $35.000    $50.000    $65.000    $40.000
Materials Purchases                                   
                                    
Cash Collections         November    December    January    February    March    April    May    June
First Month  (30%)                                   
Second Month  (35%)                                   
Third Month  (35%)                                   
Total Collections                                   
                                   
Cash Disbursements                                             
Material Purchases                                   
Salaries                 $6.000.00      $60.000.00      $60.000.00      $60.000.00      $60.000.00      $6.000.00
Wages                 $3.000.00      $35.000.00      $3.000.00      $3.200.00      $3.500.00      $3.000.00
Other Expenses                                   
Capital Expenditure                         $25.000.00            
Dividends                         $1.000.00              $1.000.00
Interest                                   
Total Disbursements                                   
                                   
Cash flows                                   
Net cash flows                                   
Cumulative cash flows                                   
Minimum Cash Balance                                   
Cash Surplus or Deficit                                   
                                    
                                    
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