Rusty Spears, CEO of Rusty’s Renovations,
glangsing
rusty_spears_ceo_of_rustys_renovations.xlsxBuild a Model
| 12/8/12 | ||||||||||||||||||
| Chapter: | 16 | |||||||||||||||||
| Problem: | 18 | |||||||||||||||||
| 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 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 Data | ||||||||||||||||||
| Collections during month of sale | 15% 1461: Assumed constant: Do not change. |
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| Collections during month after sale | 65% 1461: This is a formula: do not change. |
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| Collections during second month after sale | 20% 1461: For problem e: Allow this to change to reflect slower collections. |
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| Lease payments | $5,000 | |||||||||||||||||
| Target cash balance | $40,000 | |||||||||||||||||
| General and administrative salaries | $15,000 | |||||||||||||||||
| Depreciation charges | $7,500 | |||||||||||||||||
| Income tax payments (Sep & Dec) | $25,000 | |||||||||||||||||
| Miscellaneous expenses | $2,000 | |||||||||||||||||
| New office suite payment (Oct) | $80,000 | |||||||||||||||||
| Cash on hand July 1 | $60,000 | |||||||||||||||||
| Sales, labor, and RM adjustment factor | 0% | |||||||||||||||||
| a. Prepare a monthly cash budget for the last six months of the year. | ||||||||||||||||||
| May | June | July | August | September | October | November | December | January | ||||||||||
| Original sales estimates | $60,000 | $100,000 | $130,000 | $120,000 | $100,000 | $80,000 | $60,000 | $40,000 | $30,000 | |||||||||
| Original labor and raw mat. estimates | $75,000 | $90,000 | $95,000 | $70,000 | $60,000 | $50,000 | $20,000 | $20,000 | ||||||||||
| Forecasted Sales | ||||||||||||||||||
| Sales (gross) | ||||||||||||||||||
| Collections | ||||||||||||||||||
| During month of sale | ||||||||||||||||||
| During 1st month after sale | ||||||||||||||||||
| During 2nd month after sale | ||||||||||||||||||
| Total collections | ||||||||||||||||||
| Purchases | ||||||||||||||||||
| Labor and raw materials | ||||||||||||||||||
| Payments for labor and raw materials | ||||||||||||||||||
| Payments | ||||||||||||||||||
| Payments for labor and raw materials | ||||||||||||||||||
| General and administrative salaries | ||||||||||||||||||
| Lease payments | ||||||||||||||||||
| Miscellaneous expenses | ||||||||||||||||||
| Income tax payments | ||||||||||||||||||
| Design studio payment | ||||||||||||||||||
| Total payments | ||||||||||||||||||
| 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 | ||||||||||||||||||
| Cash Surplus (or Loan Requirement) | ||||||||||||||||||
| Target cash balance | ||||||||||||||||||
| Surplus cash or loan needed: Cum NCF – Target cash | ||||||||||||||||||
| Max. Loan | ||||||||||||||||||
| b. How much must Spears borrow each month to maintain the target cash balance? | ||||||||||||||||||
| Answer. Look at the "Surplus cash or loan needed" line at the bottom of the cash budget. | ||||||||||||||||||
| c. Would the cash budget be accurate if inflows came in all during the month but outflows were bunched | ||||||||||||||||||
| early in the month? | ||||||||||||||||||
| d. If the company operates on a seasonal basis, how would this affect the current ratio and the debt ratio? | ||||||||||||||||||
| 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 | Maximum Loan Required | |||||||||||||||||
| in Sales | % Collections in 2nd month | |||||||||||||||||
|
1461: Put the max loan for the base case hear. |
1461: Use Excels MIN function for row 54 with a minus sign in front. |
1461: Original sales estimate times 1 plus the sales adjustment factor. |
1461: Original sales estimate times 1 plus the sales adjustment factor. |
1461: Original sales estimate times 1 plus the sales adjustment factor. |
1461: Original sales estimate times 1 plus the sales adjustment factor. |
1461: Original sales estimate times 1 plus the sales adjustment factor. |
1461: Original sales estimate times 1 plus the sales adjustment factor. |
1461: Original sales estimate times 1 plus the sales adjustment factor. |
1461: Original sales estimate times 1 plus the sales adjustment factor. |
1461: Original sales estimate times 1 plus the sales adjustment factor. |
Michael C. Ehrhardt: Original labor and RM estimates times 1 plus the sales adjustment factor. |
1461: Assumed constant: Do not change. |
1461: Payments this month are for last months Labor and raw materials. |
1461: This is a formula: do not change. |
1461: For problem e: Allow this to change to reflect slower collections. |
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.
