Rusty Spears, CEO of Rusty\'s Renovations, a custom building and repar comppany,
ID: 2760431 • Letter: R
Question
Rusty Spears, CEO of Rusty's Renovations, a custom building and repar comppany, is reparig documentation for a line of credit request from his commercial bankr. Among the required documents is a detailed sales forecast for parts of 2014 and 2015 May 2014 Sales $60,000 Labor and Raw Materials $75,000 June 2014 Sales $100,000 L&RM $90,000 July 2014 Sales $130,000 L&RM $95,000 August Sales $120,000 L&RM $70,000 September $100,000 L&RM $60,000 October Sales $80,000 L&RM $50,000 November Sales $60,000 L&RM $20,000 December Sales $40,000 L&RM $20,000 Jauary 2015 Sales $30,000 L&RM none. Estimates obtined from the credit ad collection department are : collections within the month of sales, 15%; collections during the month following sales, 65%; collections the scond month following the sale, 20%. Payments for labor and row materials are typically made during the month following the one in which these costs were incurred. Tootal costs for labor and row materials are estimated for eaxh month as shown before. General and administrative salaries will amount to approximately $15,000 a month; lase payments under long term lease contracts will be $5,000 a month; depreciation charges will be $7,500 a month; miscellanious expenses will be $2,000 a month; income tax payment of $25,000 will e 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 througout the cash budget period.
1. Prepare a monthly cash budget for the last 6 month of 2014
2. Prepare an esimate of the required financing (or Excess funds)- that is, the amount of money Rusty's Renovations will need to borrow (or will have to invest)- for eaach month during that period.
3. Assume that receipts from sales come in informly during the month (i.e., cash receipts come in at the rate of 1/30 each day) but that all outflows are paid on the 5th of the month. Will this have an effect on the cash budget- inn other words, would the cash budget you have prepared be valid under these assumptions? If not, what can be done to mke a valid estimate of peak financing requirements?
4. Rusty Renovations produces on a seasonal basis, juust ahead of sales. ithout making any calculations, discuss how the company's current raio nd dbt ratio would vary during the year assuming all financial requirements were met by short-term bank loans. Could changes in these ratios affect the firm's ability to obtain bank credit? Why or why not?
5. If its customers began to pay late, this would slow down collections and thus increaase the required loan amount. Also, if sales dropped off, this would have an eefect on the required loan amount. Perform a sensitivity analysis thar shows the effects of these two factors on the maximum loan requirement.
Include word and Exel with calculations shown
Explanation / Answer
Answer 1: Monthly cash budget for the last 6 month of 2014 of Rusty's Renovations (Amount in $) Particulars July August September October November December July 60000 0 0 0 0 0 Total Cash collections from Sales 96500 122500 119000 101000 81000 61000 Less: Labor and Raw Materials Payment 90000 95000 70000 60000 50000 20000 General and administrative salaries 15000 15000 15000 15000 15000 15000 Lease Payments 5000 5000 5000 5000 5000 5000 Depreciation charges 7500 7500 7500 7500 7500 7500 Miscellaneous expenses 2000 2000 2000 2000 2000 2000 Income Tax payment 0 0 25000 25000 0 0 Progress payment 0 0 0 80000 0 0 Available Cash balance at month end 37000 -2000 -5500 -93500 1500 11500 Answer 2: Estimate of the required financing (or Excess funds) of each month during that period for Rusty's Corporation (Amount in $) Particulars May June July August September October November December January February March Available Cash balance at month end -20500 -50500 37000 -2000 -5500 -93500 1500 11500 -7000 -2000 -23500 Minimum cash balance to be maintained 40000 40000 40000 40000 40000 40000 40000 40000 40000 40000 40000 External funds required 60500 90500 3000 42000 45500 133500 38500 28500 47000 42000 63500 Workings: 1. Cash collection from sales July (60000*20%)+(100000*65%)+(130000*15%) August (100000*20%)+(130000*65%)+(120000*15%) September (130000*20%)+(120000*65%)+(100000*15%) October (120000*20%)+(100000*65%)+(80000*15%) November (100000*20%)+(80000*65%)+(60000*15%) December (80000*20%)+(60000*65%)+(40000*15%) 2. Labor and Raw Materials Payments Payments for Labor and Raw materials have been made during the month following the one in which these costs were incurred which is illustrated below Labor and Raw Materials incurred in June of 90000 expensed in month of July Labor and Raw Materials incurred in July of 95000 expensed in month of August Labor and Raw Materials incurred in August of 70000 expensed in month of September Labor and Raw Materials incurred in September of 60000 expensed in month of October Labor and Raw Materials incurred in October of 50000 expensed in month of November Labor and Raw Materials incurred in November of 20000 expensed in month of December 3. Available cash balances at month end have been computed by deducting all expense from summation of Cash in hand and Cash collection July (60000+96500)-(90000+15000+5000+7500+2000) August 122500-(95000+15000+5000+7500+2000) September 119000-(70000+15000+5000+7500+2000+25000) October 101000-(60000+15000+5000+7500+2000+25000+80000) November 81000-(50000+15000+5000+7500+2000) December 61000-(20000+15000+5000+7500+2000) 4. Required financing (or Excess funds) of each month It has been computed by deducting Available Cash balance at the end of month from Minimum cash balance to be maintained May 40000-(-20500) June 40000-(-50500) July 40000-37000 August 40000-(-2000) September 40000-(-5500) October 40000-(-93500) November 40000-1500 December 40000-11500 January 40000-(-7000) February 40000-(-2000) March 40000-(-23500)
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