What is the historical sales analysis of Precision Machines?

  

Precision
Machines
Read the following
case study:
Precision Machines
is preparing a financial plan for the next six months to determine the
financial needs of the company. The historical analysis of the companys sales
shows that the companys total sales are 30% cash sales and 70% credit
sales. Further analysis of credit sales
shows that the company receives 50% of the credit sales one month after the
sale and the remaining 50% in the second month after the sale. This means the
cash collections from sales are 30% in the first month of the sale, 35% in the
second month, and 35% in the third month.
The materials purchased by the company amounts to 50% of the
sales for the month. The company pays
for the purchases one month after the initial purchase. The company likes to
maintain a cash balance of $5,000. The cost of borrowing is 10%. The company plans to pay off the loan
whenever there is a surplus and borrow when there is a deficit.
The attached spreadsheet shows revenues (sales), expenses,
capital expenditures, and other expenses for Precision Machines next six
months. Using the information given on
the spreadsheet, prepare a cash budget for January through June and determine
the cash surplus, deficit, and the financing needs of the company.Recommend a cash management strategy for the company that will minimize the financing cost and increase the cash flows for the company.
Precision Machines
Student Note: Fill in the light yellow cells
Data:
Annual Cost of borrowing
Minimum Cash Balance
Beginning Cash Balance
Revenues (Sales)
Cash Collections
First Month (30%)
Second Month (35%)
Third Month (35%)
Total Collections
Cash Disbursements
Material Purchases
Salaries
Wages
Other Expenses
Capital Expenditure
Dividends
Interest
Total Disbursements
Cash flows
Net cash flows
Cumulative cash flows
Minimum Cash Balance
Cash Surplus or (Deficit)
Recommendations:
November
December
January
February
$40,000.00
$50,000.00
$48,000.00
$55,000.00
November
December
January
February
6,000.00
3,000.00
6,000.00
3,500.00
10.00%
$5,000.00
$7,500.00
March
April
May
June
$35,000.00
$50,000.00
$65,000.00
$40,000.00
March
April
May
June
6,000.00
3,000.00
6,000.00
3,200.00
6,000.00
3,500.00
6,000.00
3,000.00
45,000.00
1,000.00
1,000.00

Introduction:
Precision Machines is a leading company that specializes in producing top-quality machines. In preparation for future financial needs over the next six months, the company has commissioned a comprehensive financial plan. This plan aims to give insights into the cash flows of the business and help determine the effectiveness of its financial operations.

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Description:
Precision Machines has a good understanding of the financial landscape of the business and its sales history. The sales analysis indicates that the company’s total sales consist of 30% cash sales and 70% credit sales. Moreover, the company receives 50% of the credit sales one-month after the sale and the other half in the second month. This means there is a cash collection from sales of 30% in the first month, 35% in the second month, and 35% in the third month.

The company’s cash purchases materials only amount to 50% of the total sales amount per month. They pay for these materials one month after the initial purchase. Precision Machines maintains a minimum cash balance of $5,000 and decides to borrow money only when there is a deficit and pay off the debt when there is a surplus.

The spreadsheet provided shows revenues (sales), expenses, capital expenditures, and other payments for Precision Machines for the next six months. By utilizing this data, the students are expected to prepare a cash budget for January through June to determine the cash surplus/deficit and funding requirements of the company. Finally, the recommendation for a cash management strategy that would achieve a low financing cost and increase cash flow for the company will complete the financial plan.

Objectives:
To prepare a cash budget for Precision Machines for the next six months and determine the company’s cash surplus, deficit, and financing needs.
To recommend a cash management strategy for Precision Machines that will reduce financing costs and increase cash flows for the company.

Learning Outcomes:
By the end of this case study, learners will be able to:
– Analyze the historical sales data of a company
– Calculate cash collections and disbursements for a company
– Understand and apply the concept of cash budgeting
– Predict a company’s cash surplus, deficit, and financing needs
– Recommend a cash management strategy for a company that will minimize financing costs and increase cash flows.

Solution 1: Cash Budget and Financing Needs

Precision Machines can use the data provided to create a cash budget for the next six months. The cash budget will help in determining the cash surplus, deficit, and financing needs of the company. Based on the data given, the following table shows the cash budget for Precision Machines from January to June.

Cash Budget January February March April May June Beginning Cash Balance $7,500.00 $6,117.50 $- $- $- $- Cash Inflow Collections (30%) $14,400.00 $16,962.50 $10,500.00 $17,500.00 $22,750.00 $14,000.00 Total Cash Inflow ,400.00 $16,962.50 $10,500.00 $17,500.00 $22,750.00 $14,000.00 Cash Outflow Material Purchases $20,000.00 $22,500.00 $32,500.00 $20,000.00 $32,500.00 $20,000.00 Salaries $6,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 Wages $3,500.00 $3,500.00 $3,500.00 $3,500.00 $3,500.00 $3,500.00 Other Expenses $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 $1,000.00 Capital Expenditure $1,000.00 $- $- $- $- $- Dividends $- $- $- $- $- $- Interest $450.00 $438.13 $1,042.50 $1,282.50 $1,935.00 $1,396.25 Total Cash Outflow ,950.00 $33,438.13 $44,042.50 $31,782.50 $44,935.00 $31,896.25 Net Cash Flow -$18,550.00 -$16,475.63 -$33,542.50 -$14,282.50 -$22,185.00 -$17,896.25 Cumulative Cash Flow -$18,550.00 -$35,025.63 -$68,568.13 -$82,850.63 -$105,035.63 -$122,931.88

Based on the cash budget, Precision Machines will require financing to cover the shortfall in cash flow. The company has a cash deficit in all the months, except January and February, when it begins the year with a positive cash balance. The financing needs of the company for the first six months are:

• March: $33,542.50
• April: $14,282.50
• May: $22,185.00
• June: $17,896.25

Solution 2: Cash Management Strategy

To minimize the financing cost and increase the cash flows for Precision Machines, the company can adopt the following cash management strategy:

1. Increase cash collections: Precision Machines should encourage more cash sales to increase their cash inflow. The company can offer discounts and promotions to customers who pay with cash. This will help the company to increase its cash reserves and reduce its reliance on credit sales.

2. Negotiate better terms with suppliers: To improve its cash flow, Precision Machines can negotiate better terms with its suppliers. The company can ask for longer payment periods or discounts on early payments.

3. Reduce expenses: The company can reduce its expenses by cutting down on unnecessary costs. Precision Machines can review its expenditures and create a budget that aligns with its cash flow. The company can also consider reducing its workforce or outsourcing some functions to save on labor costs.

4. Use short-term financing: Precision Machines can use short-term financing options to cover its cash deficits. The company can use lines of credit or short-term loans to cover its financing needs. However, the company should be mindful of the cost of borrowing and the repayment terms.

By adopting these strategies, Precision Machines can increase its cash flow and reduce its financing costs, which will improve the financial health of the company.

Suggested Resources/Books:
1. Introduction to Corporate Finance by Lawrence J. Gitman
2. Financial Management: Theory & Practice by Eugene F. Brigham & Michael C. Ehrhardt
3. Corporate Financial Management by Glen Arnold
4. Cash Management: Corporate Strategies for Profit by C. J. Afton

Similar Asked Questions:
1. What is the importance of cash budgeting for a company?
2. What factors should be considered while preparing a cash budget for a company?
3. How can a company manage its cash balance efficiently?
4. What are the consequences of not maintaining a minimum cash balance by a company?
5. How does an increase in the cash flow of a company affect its financing cost?

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