1. Even though sales have been increasing, why is Best Electronics in such a cash flow crunch?
The poor cash position of Best Electronics is highly attributed to a lack of planning of their cash movement. It could also be caused by the lenient credit terms or the poor collection practices of the company. In some months, the firm’s purchases which is 80% of their gross sales cannot be sustained by their cash collections. This resulted to a negative balance in their cash account and their overdrafts.
2. What does the firm need to do as soon as possible?
The firm needs to address their cash flow problems through better planning and adapting of control measures. They need to prepare financial budgets and forecasts to enable them allocate their funds properly.
3. Prepare the collections worksheet. Which month has the greatest amount of cash inflows?
December has the highest cash inflow amounting to $808,350. Please see Excel worksheet.
4. Prepare the disbursements worksheet. Which months seem to be hit by the highest amount of cash outflows? Why? Can this trend be changed?
The firm is expected to disburse $919,000 in December. This is the highest amount of cash outflow for the entire year due to the payment of purchases and taxation. Because of this, the firm is looking at a deficit for the month amounting to 44,500.
Sales are at its peakest in December. Quarterly taxes are also paid during this time. These are circumstances that are beyond the control of Mark. What he can do, however, is to prepare for these disbursements with enough cash balance to meet the requirements for this month whether it be additional loans or infusion of capital.
5. How should the depreciation expense he treated in the cash budget?
Depreciation should not be considered in the cash budget since these expenses do not involve actual cash outflow. The purchase of assets that are to be depreciated, however, should be included when making cash budgets since these would entail actual cash disbursement.
6. Which month seems to be particularly vulnerable to cash deficits? Which months have the greatest surpluses?
The months of September and December are the most vulnerable to cash deficits. On the other hand, the first four months of the year have the greatest surpluses with February as the highest.
7. If the cash balance outstanding is -$2,000, help Joe develop a cash budget for Best Electronics for the next twelve months. How can Mark use the cash budget to minimize cash shortages and plan for the future?
Please see the Excel worksheet for the cash budget.
A cash budget is a powerful tool in managing a business’s seasonality. It serves as a critical indicator of the firm’s ability to meet its obligations, especially the current ones. Cash budgets also help identify which periods need additional funds in order to plan for options to meet the requirements. Likewise, it can also point out which months have surpluses and enable the firm to plan for savings.
Based on the attached cash budget, Mark can already identify which months have the high cash outflows and which months have cash surpluses. With this information, he can plan and adjust his schedule of purchases and not just use next month’s sales projection as a basis.
Mark can also review and strengthen the efficiency of their credit and collection practices. It is obvious that a 40-30-30 allocation is not enough to meet the firm’s cash requirements on certain months.
8. How can a minimum cash balance be built in? How much of a minimum cash balance seems warranted? What can the company do with the excess cash that is generated in some months?
A minimum cash balance can be maintained based on the firm’s cash budget. It should be enough to cover the company’s monthly fixed costs which includes the employees’ salaries, debt payments, other expenses and taxes. Aside from these expenses, the firm should also allocate a certain percentage to cover for the seasonality of their purchases.
To maximize the firm’s cash surplus on certain months, Mark can opt to invest it in short-term time deposits or other investment bonds. However, he can also use the extra cash to stock on their inventory to serve as a buffer for month’s with high sales.