Analysis of monthly cash budget of Cyrus Brown Manufacturing Company - Essay Example

Financial Management S JUNE 25, Part Analysis of monthly cash budget of Cyrus Brown Manufacturing Company for 9 months. Annex 1 exhibits the projected financial statement of Cyrus Brown Manufacturing Company for 9 months and a Cash Flow Statement. From these statements, we can see the projected progress of sales of CBM for the 9 months period, and readily appreciate the data on its year end, as the data will shape what will happen during this period. We will note from the income statement the net cash inflows from operations during the year after deducting the direct manufacturing costs and indirect expenses. As shown from the FS, the sales forecast for March and April are not sufficient to produce profit for the said months as expenses exceed projected sales. For the month of May, profit will be realized as projected sales have been increased. A substantial loss is seen for the month of June. A brief analysis of the data reveals that the loss is because of an investment made for plant structure and payment of taxes. The biggest sales forecast comes in September; however, it is also coupled with corresponding increase of expenses that includes second installment of payment of taxes; total expenses are 90% of sales. Accordingly, expected profit is reduced. There is a 42% drop in sales in October which is quite significant as it will also considerably affect the projected profit of the company and will reduce the cash receipts for the month. There is no explanation why the forecast of sales has gone down in October and November. TheTaxes have been deducted from the computations so the earnings that are shown in the balance are NET, that is no tax and interest have to be deducted. The net earnings are funds available for other uses like payment of debts or for other investments (Investorwords, n.d.) A projected monthly cash flow statement for March to November is presented for CBM to show the incoming and outgoing cash in the operations of the business. (See Annex 1). A cash flow has been defined as an accounting process that shows the difference of amount of cash in the beginning (opening balance) and the amount at the end of the period (closing balance) (Business Dictionary.com., n.d.). Management of cash flows is an important part of the business operations because most often it becomes the source of failure for most businesses. Thus, FindLaw (n.d) contends that when the owner of the business understands the concept of cash management, he is prepared in the unforeseen eventualities in the business because he has a plan. Cash flows may become positive or negative during operations. When it is positive, business is shown to be in a healthy condition, while negative cash outflow shows internal problems in the operations. For CBM, its cash position shows negative cash outflow in the first two months of operations because of poor collection in March and slow growth of sales in March up to April. Cash flows will show the sources of funds used in the operations and how and where the funds are used. For sources of funds CBM provided an opening balance of $50,000 and collections from monthly sales. For March, only 75% of projected sales are expected to be collected. From April to November, 100 percent collection is expected to be collected. Because expenses are more than the funds collected from March to June there is a shortage of funds for this period. Due to this, CBM needs to get outside sources of funds to finance its operations for March, April and June. There is a large cash outflow in June because of a capital investment and payment of taxes in June, after which cash flow becomes positive and profit accrue to the business. The cash on hand provided by CBM is $50,000.00 and it will need additional funds to support its operations. Approximately CBM needs a minimum credit line of $24,500 to draw for its monthly shortage of funds. It is assumed that CBM had provided capital for operations and there is no need to borrow additional funds. Conclusion. A cash flow projection for CBM shows the need for borrowing of funds for the start of operations. Thus, the cash flow projection will help CBM to draw a financial plan on where to get the needed financing in the course of its operations. CBM may either draw from their own personal funds or borrow from lending institutions to fund shortages of funds. Analysis so far showed the portions in operations where CBM should exercise control like expenses and improvement of sales in October and November that fell significantly after a big forecast in September. Part 2: a. Cash rebates and other cash management techniques. Rebate is a reduction in price. It is marketing strategy used by businesses to promote their products or services by offering to reimburse the customers a part of their purchase following a sale. Other forms of marketing techniques are coupons and discounting done at the time of sale. Rebates are typically offered by manufacturers of health and beauty products, household supplies, small and large appliances, car manufacturers, wine and liquor makers and segments of computer industry. Rebates, discounts and coupons are sound and ethical business practices because it makes the product attractive to customers. It is also a tax-free cash reimbursement of their purchase because the Internal Revenue Service considers it as a reduction of the price and not as an income. Rebates are advantageous to manufacturers since it encourages customers to try their products; it boosts sales and visibility and develops brand loyalty. According to “Rebates Law and Legal Definition”, rebates become illegal if it has been secretly accepted by a subcontractor from a contractor from obtaining a job. Rebates are also subject to the Federal Truth in Lending Act when it pertains to installment contracts that require loan disclosures. A loan disclosure under this Act consists of all finance charges and annual percentage charges. The amount or rebates paid by these companies to their customers is wide ranging; some are only less than a dollar while big items like cars, rebates typically reaches several thousand dollars. Thus, the size of the rebate depends on the kind of product being promoted. The rebates have an expiration period of six to eight months, and consumers should be aware of this date if he/she wants to avail of it. In order to be paid, consumer fills up a form usually provided by the seller during its purchase, and mails it together with other proof of purchase either to the manufacturer or to a designated clearing house specified in the form. The clearing house then processes the form and thereafter sends the customer a check in the name of the manufacturer usually within four to eight weeks from the time of receipt of information. b. The business I have selected is the car industry. I would definitely recommend that this business use rebates as a marketing strategy to promote its car sales because it has been widely known that the car industry will not exist without rebates. (“Car rebates….” 2010) According to Deaton, 2011, car rebates stimulate sales because of the savings it gives to customers. A car manufacturer can offer three types of car rebates: the cash rebates, low interest financing and special leases. Car rebates can be a good strategy to win customers when sales are slump. Toyota used car rebates as incentives to win customers. When it suffered a decline of sales in 2010, Toyota offered a lot of incentives that practically reduced the price of a Toyota car or a truck. A car rebate is not cash that is handed down to customer, rather it is a cash rebate offered on the car. Instead of paying $30,000 for a brand new car, a 10% rebate is given to customer so the car price becomes $27,000. In an industry where there is stiff competition like the car industry, shoppers usually go around to look for the best value proposition of dealers that include rebates and incentives. So, as a dealer of cars, I would recommend that business owners study the rebates and incentives structures offered by competition in order to become competitive in the market. Annex 1 References: Business Dictionary.com (n.d) Cash Flow definition. Accessed 24 June 2011 “Car rebates: are they really good enough?” 2011. Car rebates at CarRebates.net. Accessed 24 June 2011 Deaton, Jamie Page, 2011. How Car Rebates and Incentives Work. How Stuff Works. Accessed 24 June 2011 Investorwords (n.d) “Net Earnings” definition. Accessed 24 June 2011 FindLaw. April 2009. The importance of cash management. Accessed 24 June 2011 “Rebates: Law and Legal Definition” 2011. US Legal.com Accesse 24 June 2011 Read More