Your family business is expanding. Based on your experience and in depth knowledge of the market,...

     

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Your family business is expanding. Based on your experience and in depth knowledge of the market, you have estimated the following results for the first 2 years (8 quarters) of the project. • Expected revenues for the first two years are as follows. o In addition, sales for the 1" quarter of Year 3 are projected at $520,000. Year 1 ('000s) Year 2 (000s) o102 03 04 01 02 03 04 40 72 128 160 224 280 352 440 • General and administrative expenses (wages, taxes, office etc.) are estimated to be 15% of sales. • Sales salaries and commissions are estimated to be 10% of sales. • Accounts receivable at the beginning of this expansion are $0. o Collection period 30 days • Accounts payable at the beginning of the expansion are $0. o The Company quarterly purchases from suppliers = 60% of the next quarter's forecasted sales. o Suppliers are paid on average in 60 days. • You will need to buy new equipment & furniture in both Year 1- Q1 and Year 1- Q4 for $40,000 ($80,000 total in Year 1). • To help start the expansion you have secured an initial cash loan from the bank of $80,000. Interest on this loan is $2,400 per quarter. The company will pay back the full $80,000 in the Year 2 - Q4. • Interest on any additional short-term borrowing is expected to be 3% per quarter. • The Company wishes to maintain an $80,000 minimum balance at all times to best manage its working capital and any unexpected commitments. Question! 1. From above, does the company require any short-term financing? Explain. (50 100 words) a. If so, use the template in Appendix B to build a Short-Term Financing Plan. 2. What are your thoughts on the viability of the expansion? Consider a. Both the above budgets Appendix A- Cash Budget Year 1 ('000s) Year 2 (000s) QI Q2 Q3 Q4 QI Q2 Q3 Q4 Cash Collections Beginning A/R Sales Collection of accounts 0 13,333 24,000 42,667 53,333 74,667| 93,333 |117,333 40,000 72,000 128,000 160,000 224,000 280,000 352,000 |440,000 26,667 61,333 109,333 149,333 202,667 261,333 328,000 410,667 Ending A/R 13,333 24,000 42,667 53,333 | 74,667 93,333 117,333 146,667 Cash Disbursements Beginning A/P Purchases Paid A/P Ending A/P 0 28,800 51,200 64,000| 89,600 112,000 140,800 176,000 43,200 76,800 96,000 134,400 168,00 211,200 264,000 312,000 14,400 54,400 83,200 108,800 145,600 182,400 228,800 280,000 28,800 51,200 | 64,000| 89,600 112,000 140,800 |176,000 |208,000 Total Cash Outflows Paid A/P 14,400 54,400 83,200 108,800 145,600 182,400 228,800 280,000 General & admin. Expenses 6,000 10,800 19,200| 24,000| 33,600 | 42,000 52,800 | 66,000 Sales salaries & commissions Capital expenditures Loan Repayment Loan Interest 4,000 7,200 12,800 16,000 22,400 28,000 35,200 44,000 40,000 40,000 80,000 2,400| 2,400 2,400 2,400 2,400 2,400 2,400 2,400 Additional interest for Shortterm add-I borrowing Total cash disbursements 1,204 1,644 1,941 3,256 3,393 3,299 3,134 66,800 76,004 119,244 193,141 207,256 258,193 322,499| 475,534 Net Cash Flows Beginning cash balance Total cash collections Total cash disbursements Net cash inflow 80,000 80,000 80,000| 80,000 80,000 | 80,000 26,667 61,333 109,333 149,333 202,667 261,333 328,000 410,667 66,800 76,004| 119,244| 193,141 207,256 258,193 322,499| 475,534 40,133 14,671 39,867 65,329 70,089| 36,192 80,000 80,000 80,000| 80,000 | 80,000 | 80,000| 80,000 | 80,000 80,000 | 80,000 9,911| 43,808 5,501| 64,867 85,501 15,133 4,589 3,140 Ending cash balance Minimum cash balance Cumulative surplus (deficit) 40,133 54,804 64,715 108,523 113,112 109,972 104,471 169,339 Add-l Shortterm borrowing/repayment 75,411 83,140 40,133 14,671 9,911 43,808 4,589 3,140 5,501 64,867 Appendix B - Short-Term Financing Plan Year 1 (000s) Year 2 (*000s) Q102030401 Q2 Q3 Q4 Beginning cash balance Net cash flow Ending Cash Balance (before borrowing or repayment) Interest on exiting short-term borrowing New required short-term borrowing Short-term borrowing repaid Ending Cash Balance (after borrowing or repayment) Minimum cash balance Cumulative surplus (deficit) Beginning short-term debt Change in short-term debt Ending short-term debt Your family business is expanding. Based on your experience and in depth knowledge of the market, you have estimated the following results for the first 2 years (8 quarters) of the project. • Expected revenues for the first two years are as follows. o In addition, sales for the 1" quarter of Year 3 are projected at $520,000. Year 1 ('000s) Year 2 (000s) o102 03 04 01 02 03 04 40 72 128 160 224 280 352 440 • General and administrative expenses (wages, taxes, office etc.) are estimated to be 15% of sales. • Sales salaries and commissions are estimated to be 10% of sales. • Accounts receivable at the beginning of this expansion are $0. o Collection period 30 days • Accounts payable at the beginning of the expansion are $0. o The Company quarterly purchases from suppliers = 60% of the next quarter's forecasted sales. o Suppliers are paid on average in 60 days. • You will need to buy new equipment & furniture in both Year 1- Q1 and Year 1- Q4 for $40,000 ($80,000 total in Year 1). • To help start the expansion you have secured an initial cash loan from the bank of $80,000. Interest on this loan is $2,400 per quarter. The company will pay back the full $80,000 in the Year 2 - Q4. • Interest on any additional short-term borrowing is expected to be 3% per quarter. • The Company wishes to maintain an $80,000 minimum balance at all times to best manage its working capital and any unexpected commitments. Question! 1. From above, does the company require any short-term financing? Explain. (50 100 words) a. If so, use the template in Appendix B to build a Short-Term Financing Plan. 2. What are your thoughts on the viability of the expansion? Consider a. Both the above budgets Appendix A- Cash Budget Year 1 ('000s) Year 2 (000s) QI Q2 Q3 Q4 QI Q2 Q3 Q4 Cash Collections Beginning A/R Sales Collection of accounts 0 13,333 24,000 42,667 53,333 74,667| 93,333 |117,333 40,000 72,000 128,000 160,000 224,000 280,000 352,000 |440,000 26,667 61,333 109,333 149,333 202,667 261,333 328,000 410,667 Ending A/R 13,333 24,000 42,667 53,333 | 74,667 93,333 117,333 146,667 Cash Disbursements Beginning A/P Purchases Paid A/P Ending A/P 0 28,800 51,200 64,000| 89,600 112,000 140,800 176,000 43,200 76,800 96,000 134,400 168,00 211,200 264,000 312,000 14,400 54,400 83,200 108,800 145,600 182,400 228,800 280,000 28,800 51,200 | 64,000| 89,600 112,000 140,800 |176,000 |208,000 Total Cash Outflows Paid A/P 14,400 54,400 83,200 108,800 145,600 182,400 228,800 280,000 General & admin. Expenses 6,000 10,800 19,200| 24,000| 33,600 | 42,000 52,800 | 66,000 Sales salaries & commissions Capital expenditures Loan Repayment Loan Interest 4,000 7,200 12,800 16,000 22,400 28,000 35,200 44,000 40,000 40,000 80,000 2,400| 2,400 2,400 2,400 2,400 2,400 2,400 2,400 Additional interest for Shortterm add-I borrowing Total cash disbursements 1,204 1,644 1,941 3,256 3,393 3,299 3,134 66,800 76,004 119,244 193,141 207,256 258,193 322,499| 475,534 Net Cash Flows Beginning cash balance Total cash collections Total cash disbursements Net cash inflow 80,000 80,000 80,000| 80,000 80,000 | 80,000 26,667 61,333 109,333 149,333 202,667 261,333 328,000 410,667 66,800 76,004| 119,244| 193,141 207,256 258,193 322,499| 475,534 40,133 14,671 39,867 65,329 70,089| 36,192 80,000 80,000 80,000| 80,000 | 80,000 | 80,000| 80,000 | 80,000 80,000 | 80,000 9,911| 43,808 5,501| 64,867 85,501 15,133 4,589 3,140 Ending cash balance Minimum cash balance Cumulative surplus (deficit) 40,133 54,804 64,715 108,523 113,112 109,972 104,471 169,339 Add-l Shortterm borrowing/repayment 75,411 83,140 40,133 14,671 9,911 43,808 4,589 3,140 5,501 64,867 Appendix B - Short-Term Financing Plan Year 1 (000s) Year 2 (*000s) Q102030401 Q2 Q3 Q4 Beginning cash balance Net cash flow Ending Cash Balance (before borrowing or repayment) Interest on exiting short-term borrowing New required short-term borrowing Short-term borrowing repaid Ending Cash Balance (after borrowing or repayment) Minimum cash balance Cumulative surplus (deficit) Beginning short-term debt Change in short-term debt Ending short-term debt

Answer rating: 100% (QA)

YEAR1 YEAR2 Year3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Cash Collection 42667 93333 117333 146667 Beginning A... View the full answer