Question

Start with the partial model in the file attached. Marvel Pence, CEO of Marvel’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 2020 and 2021:

Sales

Labor and Raw materials

May 2020

$75,000

$80,000

June 2020

$115,000

$75,000

July, 2020

$145,000

$105,000

August 2020

$125,000

$85,000

September, 2020

$120,000

$65,000

October, 2020

$95,000

$70,000

November, 2020

$75,000

$30,000

December, 2020

$55,000

$35,000

January, 2021

$45,000

N/A

Estimates obtained from the credit and collection department are as follows: collections within the month of sale, 20%; collections during the month following the sale, 60%; collections the second month following the sale, 25%. 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 $25,000 a month; lease payments under long-term lease contracts will be $7,000 a month; depreciation charges will be $8,000 a month; miscellaneous expenses will be $5,000 a month; income tax payments of $30,000 will be due in both August and December; and a progress payment of $95,000 on a new office suite must be paid in October. Cash on hand on July 1 will amount to $70,000, and a minimum cash balance of $30,000 will be maintained throughout the cash budget period.

a. Prepare a monthly cash budget for the last 6 months of 2020.

b. Prepare an estimate of the required financing (or excess funds)—that is, the amount of money Marvel’s Renovations will need to borrow (or will have available to invest)—for each month during that period.

c. 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 amount. Perform a sensitivity analysis that shows the effects of these two factors on the maximum loan requirement.

Answer 1

FORECASTED SALES

	May	June	July	August	September	October	November	December	January
Sales	$75,000	$115,000	$145,000	$125,000	$120,000	$95,000	$75,000	$55,000	$45,000
Collections:
During month of sale (20%)			$29,000 (=145,000×20%)	$25,000 (=$125,000×20%)	$24,000 (=$120,000×20%)	$19,000 (=$95,000×20%)	$15,000 (=$75,000×20%)	$11,000 (=$55,000×20%)
During 1st month after sales (60%)			$69,000 (=$115,000×60%)	$87,000 (=$145,000×60%)	$75,000 (=$125,000×60%)	$72,000 (=$120,000×60%)	$57,000 (=$95,000×60%)	$45,000 (=$75,000×60%)
During 2nd month after sales (20%)			$15,000 (=$75,000×20%)	$23,000 (=$115,000×20%)	$29,000 (=$145,000×20%)	$25,000 (=125,000×20%)	$24,000 (=$120,000×20%	$19,000 (=$95,000×20%)
Total Collection			$113,000	$135,000	$128,000	$116,000	$96,000	$75,000
In question it's written collection made 20%+60%+25%= 105% Total collection has to be 100% so I assumed last collection month as 20%

FORECASTED SALES	November	December
Sales	$75,000	$55,000
COLLECTIONS:
During month of sales	$15,000 ($75,000×20%)	$11,000 ($55,000×20%)
During 1st month after sales	$57,000 ($95,000×60%)	$45,000 ($75,000×60%)
During 2nd month after Sales	$24,000 ($12,000×20%)	$19,000 (95,000×20%)
Total collection	$96,000	$75,000

PURCHASES:

	May	June	July	August	September	October	November	December	January
Labour and Raw materials	$80,000	$75,000	$105,000	$85,000	$65,000	$70,000	$30,000	$35,000	-
Payment for labour and Raw materials			$75,000	$105,000	$85,000	65,000	$70,000	$30,000	35,000

Payment:

	July	August	September	October	November	December
Payment to labour and Raw materials	$75,000	$105,000	$85,000	$65,000	$70,000	$30,000
General and administrative expenses	25,000	25,000	25,000	25,000	25,000	25,000
Lease payment	7,000	7,000	7,000	7,000	7,000	7,000
Miscellaneous	5,000	5,000	5,000	5,000	5,000	5,000
Income tax		$30,000				$30,000
New office suit				$95,000
Total payments	$112,000	$172,000	$122,000	$197,000	$107,000	$97,000
NET CASH FLOWS:
Opening cash balance	$70,000
Net Cashflow (total collection- Total payments)	1,000	($37,000)	6,000	($81,000)	($11,000)	($22,000)
Cumulative NCF(prior month cumulative + this month NCF)	$71,000	$34,000	$40,000	($41,000)	($52,000)	($74,000)
Cash surplus
Minimum balance	$30,000	$30,000	$30,000	$30,000	$30,000	$30,000
Surplus cash or loan needed ( Cumulative NCF - Minimum balance)	$41,000	$4,000	$10,000	($71,000)	($82,000)	($104,000)

Max. Loan is $104,000.