Question

Good cash management is an essential job of the financial manager! You own a small auto sales business called King Kars. You stock up on inventory in February, April, June, and September. Your annual cash budget indicates that your MONTHLY NET CASH for the year will be the following: JAN $5,000 FEB -$30,000 MAR $20,000 APRIL -$35,000 MAY $25,000 JUNE -$10,000 JULY $25,000 AUG $25,000 SEPT -$30,000 OCT $15,000 NOV $15,000 DEC $25,000 You begin the year with a cash balance of $50,000, and the minimum cash balance desired must be $50,000 every month. Prepare a cash flow summary and external financing summary as noted in the Excel spreadsheet assigned to this submission. Do you believe that the company needs outside financing? What is the minimum line of credit to request from a lender? Do you think you are a good candidate for the line of credit? Why?

Answer 1

The following is the Cash Flow Summary prepared below for your perusal.

Months	Opening Balance	Net Cash	Closing Balance	Minimum Cash Balance	External Financing Required
January	50000	5000	55000	50000	-
February	55000	-30000	25000	50000	-25000
March	50000	20000	70000	50000	-
April	70000	-35000	35000	50000	-15000
May	50000	25000	75000	50000	-
June	75000	-10000	65000	50000	-
July	65000	25000	90000	50000	-
August	90000	25000	115000	50000	-
September	115000	-30000	85000	50000	-
October	85000	15000	100000	50000	-
November	100000	15000	115000	50000	-
December	115000	25000	140000	50000	-

The workings of the same is as follows:-

We see that only during the month of February and April the net Cash balance goes below the minimum Required Cash Balance of $50,000, therefore only during these two months there is a requirement of External Financing to the tune of $25000 and $15000 respectively.

So the lender Should be approached for lending only during these two months and the minimum lending required is $25000.

Since the requirement of money is only during two months of a calendar year, I do not consider myself as a good candidate for Lime of Credit as the line of credit is a fixed limit of money that the bank or financial institution has agreed to lend us.