Question

Salaguay Inc.

Salaguay Inc. is a new venture that purchases energy-saving devices in bulk, repackages them, and sell them and installs them to consumers. Its products consist of shower nozzles that restrict the flow of water, thermostats with timers, and storm windows. The company’s management team is preparing forecasted financial statements for the next 5 years (on a yearly basis). Its preliminary budget figures, by product, are shown below:

Forecasted Year 1 Figures

	Shower Nozzles	Thermostats	Storm Windows
Number of Items	800	200	500
Sales price per item	$40	$80	$200
Purchase cost per item	$20	$30	$92
Labor (for repackaging)	$15,000	$4,000	$25,000
Repackaging Materials	$1	$2	$5

The new firm has an overall overhead cost (general and administrative expenses) of $33 K a year. The management team estimates that this same number of overhead cost should be able to support the new venture’s ambitious expansion. The company pays employees repackaging and installing the items strictly on the same hourly basis. The startup’s management team expects unit sales to increase each year by 30%, 25% and 20% for shower, thermostats with timers, and storm windows, respectively. The new firm buys its items on 90-day credit, and bills its customers in cash. The company bought packaging machines for a total $30 k with a loan from a local bank that charges 5% annual interest on the remaining balance. The packing machines are expected to have an economic life of 7 years. The loan is to be repaid in 5 years. All expenses will grow at the expected annual inflation rate of 1.2%.

Salaguay Inc. has hired you to prepare a forecasted income statement, balance sheet and a cash budget for the next 5 years (on a yearly basis). Individually, prepare the required forecasts. You can assume the tax rate is 20% on profits, which are paid in cash in the year that they are incurred. The new venture is to start operations with an initial cash balance of $1 k provided by the 3 owners, in equal parts. The company carries 2 months-worth of finished goods inventory as a buffer against sudden surges in demand. The company wants to keep a minimum cash balance of 1 moth worth of overhead cost.

Answer 1

Budgeted Income Statement of Salaguay Inc.
	Year 1	Year 2	Year 3	Year 4	Year 5
Sales	$        148,000	$        181,600	$        223,080	$        274,354	$        337,818
Shower Nozzles	$          32,000	$          41,600	$          54,080	$          70,304	$          91,395
Thermostats	$          16,000	$          20,000	$          25,000	$          31,250	$          39,063
Storm Windows	$        100,000	$        120,000	$        144,000	$        172,800	$        207,360
COGS	$        115,700	$        142,540	$        175,832	$        217,185	$        268,624
Gross Profit	$          32,300	$          39,060	$          47,248	$          57,169	$          69,193
General and Administrative Expense	$          33,000	$          33,396	$          40,075	$          48,090	$          57,708
Interest on Loan	$            1,500	$            1,200	$                900	$                600	$                300
EBIT (Operating Profit/Loss)	$          (2,200)	$            4,464	$            6,273	$            8,479	$          11,185
Tax (20%)	$              (440)	$                893	$            1,255	$            1,696	$            2,237
Net Income/Loss	$          (1,760)	$            3,571	$            5,018	$            6,783	$            8,948

Budgeted Cash Flow Statement of Salaguay Inc.
	Year 1	Year 2	Year 3	Year 4	Year 5
Opening Balance	$            1,000	$        (69,327)	$     (106,395)	$     (146,271)	$     (188,656)
Sales	$        148,000	$        181,600	$        223,080	$        274,354	$        337,818
Purchases	$        178,267	$        177,180	$        214,726	$        260,353	$        266,225
Expenses	$          33,000	$          33,396	$          40,075	$          48,090	$          57,708
Loan	$            6,000	$            6,000	$            6,000	$            6,000	$            6,000
Interest	$            1,500	$            1,200	$                900	$                600	$                300
Tax	$              (440)	$                893	$            1,255	$            1,696	$            2,237
Closing	$        (69,327)	$     (106,395)	$     (146,271)	$     (188,656)	$     (183,308)

The negative balance of Cash is coming in the question as the Inflow of cash is not mentioned properly. In the first year, we have purchases more than sales, and the company doesn't have the cash balance as the Share investment is only $1,000.