FIN 370 Week 5 Precision Machines Financial Statements solution

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 company’s sales shows that the company’s 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.  Write a 300-word essay recommending a cash management strategy for the company that will minimize the financing cost and increase the cash flows for the company.

Precision Machines    

Data:         

 NovemberDecemberJanuaryFebruaryMarchAprilMayJune

Cost of borrowing10.00%        

Minimum Cash Balance$5.000        

Beginning Cash Balance$7.500        

Revenues (Sales)$40.000$50.000$48.000$55.000$35.000$50.000$65.000$40.000

Materials Purchases

Cash Collections NovemberDecemberJanuaryFebruaryMarchAprilMayJune

First Month  (30%)

Second Month  (35%)

Third Month  (35%)

Total Collections

Cash Disbursements         

Material Purchases

Salaries $  6.000.00 $60.000.00 $60.000.00 $60.000.00 $60.000.00 $  6.000.00

Wages $  3.000.00 $35.000.00 $  3.000.00 $  3.200.00 $  3.500.00 $  3.000.00

Other Expenses

Capital Expenditure $25.000.00

Dividends $  1.000.00 $  1.000.00

Interest

Total Disbursements

Cash flows         

Net cash flows

Cumulative cash flows

Minimum Cash Balance

Cash Surplus or Deficit

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