Black Diamond Mining Company - Example

BLACK DIAMOND MINING COMPANY – AUSTRALIA CASH FLOW BUDGET FOR MONTHS OF JANUARY TO JUNE 2016 EXECUTIVE SUMMARY Black Diamond Mining Company is a mining company based in Australia. The Chief Executive Officer (C.E.O) of the company would like to carry out some improvements that will influence the cash flow of the company. The C.E.O has two strategies to achieve this. That is, to change the mode of credit payment from monthly to one that would take a period of three months. The creditors would receive payments for their invoices using the mode, 50% within the first 30 days, 30% within the next 60 days then the remaining 20% within 90 days. The other alternative would be to give discounts on payments done cash on delivery. This will influence the cash flow such that the company would raise money on the spot that would be required to buy goods needed. That is, the money would be used to carter for the cost of goods. Both of these alternatives affect the company for the months of November through to February. The company also wishes to carry out an expansion program that would massively affect production in the months of December and January. Taking into account these factors, an expected cash flow statement for the months of January 2016 to June 2016 was prepared. Monthly cash flow budget report If the company adopts alternative 1: The first alternative the company can consider to improve cash flow within it is by changing their mode of credit payments. This means that the company takes up the means of paying in the format, 50% within 30 days, 30% within the following 30 days after that and the rest of the 20% over the next 90 days. This however attracts a fine of 15% per annum for goods paid for that go beyond the required 30 day grace period. If the reserve within the company goes below seven million the company is obligated to borrow at the interest rate of 2% per month to fill the deficit. For the month of January, the amount carried forward from the previous month is seven million and the gross income during the month adds up to little over twenty eight million. The payment plan to the creditors attracts a fee of fifty four thousand as fine for delayed payments. The amount at the end of the month is a little above four million. The cash flow is affected mostly by the fine from the delayed payments and the payments for the maintenance. This expansion also cut the sales by more than half, whose effect will be felt in the months to come. In the month of February, the company must borrow money from the bank as company policy dictates so. This sets it up for interest payments for the near future. Reduced production and sales in the months December and January, sets the company gross income to a downward trend for the month of February. The company also faces cost of ninety nine thousand for the delayed payments to the suppliers. At the end of the month, the company has a little over two million in their accounts. This is also mainly because the expansion and maintenance costs are still being met. In the month of March, the company will continue to borrow to cover the seven million deficits. Gross income to the company continues with a downward trajectory. This is because the payment plan mainly affects the months of February and March, while the effects of the expansion are felt in the month of March. This intersection means the month of March as the lowest in expected gross income. The company will pay an amount of sixty one thousand as a charge for the delayed payments. By the end of the month the company will have a total of 5.6 million in their account. This is mainly because the maintenance fee significantly reduces and is finally paid during this month. For the month of April, the payment plan effects start to wear off and the cash flow statement starts to show an upward movement. This is both in gross income and the money used in operations. The company starts paying off part of the principal amount on their loan, as per company policy. This means that the company has gains a surplus of seven million. For the month of May, the amount carried forward is seven million. The surplus was used to pay off part of the principal. The gross income for the company in this month continues to go higher. The month of May is however the month to pay dividends to the shareholders so a total of five million is added to the expenses of the month. Even with that the company still has the ability to continue paying part of the principal. The effects of the credit payment plan are felt since the payments the month of February are still being carried out. As a result a delay payment is done of twenty four thousand. For the month of June, the effects of the payment plan of the cash flow if offset. This means that the company is back to its original plan with the suppliers. However during this month the payment for the accrued interest rate is felt since the interest is paid on this month. After six months the amount in the company’s book is about 21.5 million. If the company adopts alternative 2: Alternative 2 is a payment plan that is meant to offer discounts to the customers who opt to pay cash on delivery. This option will be taken up by 30% of local customers and 50% of foreign customers. Discounts are as follows; 5% for local customers and 10% for the international customers. This is mainly to raise capital to pay off suppliers and to pay for the management fees. The plan will affect the months of November through to February. For the month of January, the gross income is around thirty one million. This is however offset by the operations expenses that end up being around twenty three million. This is mainly because of the expansion and maintenance fee. The cash at hand however is however higher than expected. At the end of the month the amount at hand is above seven million and so there will be no borrowing from the banks. For the month of February, the gross income is higher than expected too. This is because of the payment plan and the increase amount of money carried forward from the previous month. However the contribution of the payment plan for this month is sum what diminished since the approach of the months of January and December, where the massive expansion and maintenance happened. The cash carried forward is around 4.6 million. This number is reduced from the fact that the company is paying off the maintenance fee and that there was reduced production for the months of January and December. For the month of March, there is borrowing, so as to keep up with company policy. That means that there will be interest payments in the near future, thus accruing another expense. The amount collected from the payment plan reduces, since the payments made are of the months of January and December. This means that the overall effect will lead to reduced net earnings at the end of the month. These earnings amount to around 3.7 million. For the month of April, the foreign traders are still following the payment plan though the local ones have moved passed it. This leads to increased gross cash amounts. At the end of the month, the earning will be above the specified seven million. With such, part of the loan principal is repaid For the month of May, the payment of the international customers comes to an end. For the local traders the amount is as per the original plan. This month also sees the share holder paid off the dividends that is due. During this month too, the rest of the loan is repaid. For the month of June, both payment of the local and the foreigners are back to the original plan. The balances have offset themselves. During this month though there is payment of all accrued interest payments. At the end of the month the cash at hand in the company (net income) is around 21 million. ADVICE TO C.E.O and DIRECTORS Adopting either of the payment plans for the company is prudent. This is because, during the months of December and January the expansion that the company intends to undertake will grossly affect the production and thus the supply from the company. They will neither order for as much goods as they usually do, thus affecting their supplier nor will they supply as much as they usually do thus affecting their customers. Looking at this from a totally financial angle and not any other, sticking to the original arrangement with both the suppliers and the customers is most prudent. The flip side of this is that the customers or suppliers may change loyalties and the company ends up struggling to find more customers. This is a risk that is very alive and is not wise to take it. Business is about relationships. So the company should be encouraged to take up the relationship with the most return. This then implies that the company should just take up the first alternative since it has a higher return. The alternative of using both the alternative would be the best so as to ensure maximum customer – supplier loyalty but this would mean very dire financial consequences in the company. The company should also take into account aspects like tax, mining regulations and customer contracts and supplier contracts before the final decision is made. Also the changing of a bank where credit can be sourced at a lower interest would be prudent. Otherwise the expansion take is to take place seems like one that can and will very positively influence the financial status of the company. Question 2 Cash flow statement if none of the alternatives are adopted; BLACK DIAMOND MINING EXPECTED MONTHLY CASH FLOW BUDGET FOR 1ST JAN 2016 TO 31ST JUNE 2016                     JAN FEB MARCH APRIL MAY JUNE INCOME             cash c' forward   7,000,000.00 5,000,000.00 4,750,000.00 6,750,000.00 10,400,000.00 16,400,000.00                 accounts recievable local sales 9,600,000.00 9,000,000.00 13,200,000.00 15,600,000.00 16,800,000.00 19,800,000.00   exports 11,600,000.00 12,800,000.00 6,400,000.00 6,000,000.00 8,800,000.00 10,400,000.00 loan capital     2,000,000.00 2,250,000.00 250,000.00                     Cash at Hand(cash inflow)   28,200,000.00 26,800,000.00 24,350,000.00 28,600,000.00 36,000,000.00 46,600,000.00                                 OPERATION ACTIVITIES             accounts payable   7,200,000.00 6,750,000.00 9,900,000.00 11,700,000.00 12,600,000.00 14,850,000.00 management costs   2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 maintenance cost   14,000,000.00 13,300,000.00 5,700,000.00       interest             305,000.00                 Total of Operation Activities   23,200,000.00 22,050,000.00 17,600,000.00 13,700,000.00 14,600,000.00 17,155,000.00                 STOCKS             shareholders’ dividends           5,000,000.00                   Total of Stocks           5,000,000.00                   OTHERS             loan repayment         4,500,000.00                     Total of Others         4,500,000.00                     Cash Outflows   23,200,000.00 22,050,000.00 17,600,000.00 18,200,000.00 19,600,000.00 17,155,000.00                 CASH AT THE END OF MONTH 5,000,000.00 4,750,000.00 6,750,000.00 10,400,000.00 16,400,000.00 29,445,000.00 Cash flow if option 1 was adopted; BLACK DIAMOND MINING EXPECTED MONTHLY CASH FLOW BUDGET FOR 1ST JAN 2016 TO 31ST JUNE 2016                     JAN FEB MARCH APRIL MAY JUNE INCOME             cash c' forward   7,000,000.00 4,226,000.00 2,212,000.00 5,635,687.50 7,000,000.00 7,000,000.00                 accounts recievable local sales 9,600,000.00 9,000,000.00 13,200,000.00 15,600,000.00 16,800,000.00 19,800,000.00   exports 11,600,000.00 12,800,000.00 6,400,000.00 6,000,000.00 8,800,000.00 10,400,000.00 loan capital     2,774,000.00 4,788,000.00 1,364,312.50                     Cash at Hand(cash inflow)   28,200,000.00 26,026,000.00 21,812,000.00 28,600,000.00 32,600,000.00 37,200,000.00                                 OPERATION ACTIVITIES             accounts payable   7,920,000.00 8,415,000.00 8,415,000.00 16,020,000.00 14,580,000.00 11,700,000.00 management costs   2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 maintainance cost   14,000,000.00 13,300,000.00 5,700,000.00       interest             563,772.50 interest on delay   54,000.00 99,000.00 61,312.50 70,875.00 24,750.00                   Total of Operation Activities   23,974,000.00 23,814,000.00 16,176,312.50 18,090,875.00 16,604,750.00 14,263,772.50                 STOCKS             shareholders’ dividends           5,000,000.00                   Total of Stocks           5,000,000.00                   OTHERS             loan repayment         3,509,125.00 3,995,250.00 1,421,937.50                 Total of Others         3,509,125.00 3,995,250.00 1,421,937.50                 Cash Outflows   23,974,000.00 23,814,000.00 16,176,312.50 21,600,000.00 25,600,000.00 15,685,710.00                 CASH AT THE END OF MONTH 4,226,000.00 2,212,000.00 5,635,687.50 7,000,000.00 7,000,000.00 21,514,290.00 Cash flow statement alternative 2 was adopted; BLACK DIAMOND MINING EXPECTED MONTHLY CASH FLOW BUDGET FOR 1ST JAN 2016 TO 31ST JUNE 2016                     JAN FEB MARCH APRIL MAY JUNE INCOME             cash c' forward   7,000,000.00 7,565,000.00 4,677,000.00 3,477,000.00 7,000,000.00 7,654,000.00                 accounts recievable local sales 9,285,000.00 10,062,000.00 9,240,000.00 15,600,000.00 16,800,000.00 19,800,000.00   exports 14,480,000.00 9,100,000.00 7,160,000.00 3,000,000.00 4,400,000.00 10,400,000.00 loan capital       2,323,000.00 3,523,000.00                     Cash at Hand(cash inflow)   30,765,000.00 26,727,000.00 21,077,000.00 25,600,000.00 28,200,000.00 37,854,000.00                                 OPERATION ACTIVITIES             accounts payable   7,200,000.00 6,750,000.00 9,900,000.00 11,700,000.00 12,600,000.00 14,850,000.00 management costs   2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 maintainance cost   14,000,000.00 13,300,000.00 5,700,000.00       interest             280,300.00                 Total of Operation Activities   23,200,000.00 22,050,000.00 17,600,000.00 13,700,000.00 14,600,000.00 17,130,300.00                 STOCKS             shareholders dividends           5,000,000.00                   Total of Stocks           5,000,000.00                   OTHERS             loan repayment         4,900,000.00 946,000.00                   Total of Others         4,900,000.00 946,000.00                   Cash Outflows   23,200,000.00 22,050,000.00 17,600,000.00 18,600,000.00 20,546,000.00 17,130,300.00                 CASH AT THE END OF MONTH 7,565,000.00 4,677,000.00 3,477,000.00 7,000,000.00 7,654,000.00 20,723,700.00 If both alternatives were taken BLACK DIAMOND MINING EXPECTED MONTHLY CASH FLOW BUDGET FOR 1ST JAN 2016 TO 31ST JUNE 2016                     JAN FEB MARCH APRIL MAY JUNE INCOME             cash c' forward   7,000,000.00 6,791,000.00 2,139,000.00 2,362,687.50 7,000,000.00 6,595,250.00                 accounts recievable local sales 9,285,000.00 10,062,000.00 9,240,000.00 15,600,000.00 16,800,000.00 19,800,000.00   exports 14,480,000.00 9,100,000.00 7,160,000.00 3,000,000.00 4,400,000.00 10,400,000.00 loan capital     209,000.00 4,861,000.00 4,637,312.50   404,750.00                 Cash at Hand(cash inflow)   30,765,000.00 25,953,000.00 18,539,000.00 25,600,000.00 28,200,000.00 37,200,000.00                                 OPERATION ACTIVITIES             accounts payable   7,920,000.00 8,415,000.00 8,415,000.00 16,020,000.00 14,580,000.00 11,700,000.00 management costs   2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 maintainance cost   14,000,000.00 13,300,000.00 5,700,000.00       interest             471,800.00 interest on delay   54,000.00 99,000.00 61,312.50 70,875.00 24,750.00                   Total of Operation Activities   23,974,000.00 23,814,000.00 16,176,312.50 18,090,875.00 16,604,750.00 14,193,872.50                 STOCKS             shareholders dividends           5,000,000.00                   Total of Stocks           5,000,000.00                   OTHERS             loan repayment         509,125.00   9,602,937.50                 Total of Others         509,125.00   9,602,937.50                 Cash Outflows   23,974,000.00 23,814,000.00 16,176,312.50 18,600,000.00 21,604,750.00 23,796,810.00                 CASH AT THE END OF MONTH 6,791,000.00 2,139,000.00 2,362,687.50 7,000,000.00 6,595,250.00 13,403,190.00 Read More