Cash Flow Budgetary Report - Math Problem Example

CASH FLOW BUDGETARY REPORT FOR THE MONTHS OF JANUARY TO JUNE OF 2016, BLACK DIAMOND MINING COMPANY. EXECUTIVE SUMMARY Black Diamond Mining Company is a mining company based in Australia. The company has experienced a good level of success, getting this from the expected cash flow in the coming months. However, the company wishes to undertake a huge expansion in the coming months, ie in the months of December and January. This expansion will greatly affect the production of the company for these two months. The C.E.O then wishes to have an expected cash flow budget for the company. The C.E.O also wishes to take up to options to keep the company from hitting a storm during and immediately after the expansion. Why is there need for a cash flow strategy? The company will be going through an expansion that will greatly affect the production of the company. This means that both the suppliers of material to the company and the company’s customers will be affected. The suppliers may not supply will not supply as much as expected and the customers will not get as much had hoped for. As such the company needs to keep them on their good books until the effects of the expansion has been offset. The company also would like to have an assessment of alternative payment plans so as to take into account for future market penetration strategies. The company also opens itself to more customers, increasing their consumer base by offering discounts so as to offset the effects of the expansion costs on the company sooner. This also opens up the company to investment strategies to immunize against the continued discounts and delayed payments to suppliers. The C.E.O proposes that there be two strategies in play to keep the company afloat through the expansion and come out of it with both its supplier and customer base as intact as it can get. He proposes to either come up with an alternate supplier payment plan or a customer discount plan for the months of November through to February. Discussion on the cash flow budgets prepared. There are two strategies that the company can take; expected cash flow budgets have been prepared in case the company decides to take up any of them. Cash flow budget for the option of not taking up any of the options was also prepared to serve as the control condition. If the company decides to take up the first option and offer their suppliers an alternative payment plan, it will very positively influence the company’s books. This is because it will enable the company to pay less during the time of expansion and then take advantage as the fruits of the expansion start to sprout the suppliers can be paid off. The expansion takes place during the months of January and December. The costs of the expansion are catered for during the months of January, February and March. During the month of January there will be low production from the company, low income from the local customers since December will have low production too and there will be maintenance costs to be paid. If we adopt the payment plan to the suppliers then there will reduced expenses to the suppliers. Some of the money then can be used for the prevailing expenses. The downside to this deal is that it will attract a payment of 15% per annum for all delayed payments for time longer than a month. From the cash flow for the month of January, February the company with be forced to ask for a bank over draft. According to company policy, the company should do this to ensure that the company’s books read at least a seven million at the beginning of the month. The accrued interest is paid at the end of June. The interest rate is at 2% per month and for purposes of these calculations it is assumed to be simple interest. The loan repayment schedule would otherwise be very complicated. The dismal cash receivable prevail to this month, and while there are maintenance fees to pay, the company will not meet the seven million thresholds for the money carried forward to the next month. For the month of March, the last installment of the maintenance fee is paid. The company borrows some money as per the company policy. The payment plan on the part of the suppliers start to was off, but there are increased payments from the delayed payments in previous months. The influence of the expansion plan will start to be felt from this month as the cash budget sets off to upsurge in returns. For the months that follow the payment plan slow wears off and the original plan is restored. For the month of June, there are no delayed payments to any of the suppliers. The company has to however deal with other factors such as payment of accrued principal, payment of delay fees, and dividends to the shareholders. In the month of June there is payment of accrued interest payments over the previous months. From this plan, the company ends up with the books reading net cash income of over twenty six million. The company manages to navigate through a reduced liquidity period and may end up maintaining its supplier base. The company would pick this option if it wishes to maintain its supplier base. The company may also decide to take up the second option and offer discounts to their customers. This will increase the current cash reserves since money is paid up front. The company will employ this tactic to ensure even through the customer is unhappy with the reduced production, the customer is happy with the terms of service. For the month of January, this plan is very vital. It manages to have the company with enough capital at hand to pay off the maintenance fee for that month. The customers who manage to take up the discount offer will help the company with the expenses. The company receives cash from both the local customers and the international ones. The maintenance effect if averted for this month. At the end of the month surprisingly the company is able to stay above its capital threshold of seven million which is very impressive. In the month of February though, the reduced production, dispite of the payment plan catches up with the company. At the end of the month the company is unable to meet the threshold. This is because, the international clients start paying off their November arrears and the local ones are still paying of their January arrears and February arrears. These months were not so productive, so the amounts received are dismal. Even though, the amount dismal, the balance is more than the threshold The month of March sees the payment plan start to wear off and a return to the original plan. . Apart from the reduced earnings from the months of December and January, the payment plan does not extent to March. There is also the last face of expansion installment. The cash flow from this month is below the threshold, and so there will have to be borrowing the months that are to follow. For the months that follow, the discount payment plan is phased out. This is by the payments for the international clientele advance in their payments. By the month of June, the payment plan is back to the normal trend. During this time the company also pays interest that accrues over the period, all over due principal on the loan, dividends to shareholders and all other expenses incurred. By the end of the six month period, the accrued amount in the company’s account is a little over twenty three million. The company can also decide not to take up any of the options. This will mean that the company will take its chances and hope that the planned expansion will not lead to the loss of either the clients or the suppliers. This venture is very productive and assures the company of very good returns, but at a very high risk of losing clients and suppliers. The other alternative is to not take any chances and take up both alternatives. This would mean extensive reduction in the cash flow in the company, but it is the surest way to get out of the whole expansion and with both your suppliers and customers happy and satisfied. For more see the balance sheet attached. Recommendations to the C.E.O The C.E.O of Black Diamond is trying to employ two strategies to ensure that the company goes through an expansion process. The C.E.Os intentions are also very well informed since he knows not honoring the company’s commitments to the customers and the suppliers. Picking option one is the best option for the company. It not only mitigates against the risk of losing suppliers but also provides the best returns for the company from the options that are viable. The company is also advised to do more research on immunization methods’ that may be used to give the company returns if they decide to take up option 2 and give discounts to customers. The company is also asked to ensure that the strategies they devise should be in line with the rules and regulations of the mining industry especially when it comes to mining company’s liquidity. The company should also find a way to source for funds without getting credit at a very high rate of interest. The same applies to the high rate of cost of delay of payment to suppliers. The company should explore plans like equity funding, cheaper banks, a review of suppliers’ contracts or a review of the whole company policy on liquidity and borrowing. Cash flow budgets. Cash flow budget if option 1 is pursed. BLACK DIAMOND MINING COMPANY CASH FLOW BUDGET FOR THE MONTHS OF: JANUARY TO JUNE 2016 Oct Nov Dec Jan Feb March April May June Sales 29,000,000.00 32,000,000.00 16,000,000.00 15,000,000.00 22,000,000.00 26,000,000.00 28,000,000.00 33,000,000.00 34,000,000.00 Opening bal 7,000,000.00 4,226,000.00 4,986,000.00 7,000,000.00 9,144,812.50 13,115,312.50 Cash Reciepts Domestic cus' 9,600,000.00 9,000,000.00 13,200,000.00 15,600,000.00 16,800,000.00 19,800,000.00 inter' cus' 11,600,000.00 12,800,000.00 6,400,000.00 6,000,000.00 8,800,000.00 10,400,000.00 Overdraft 2,774,000.00 2,014,000.00 Total Receipts 28,200,000.00 28,800,000.00 26,600,000.00 28,600,000.00 34,744,812.50 43,315,312.50 Cash Payments Accounts payable After 30 days 3,600,000.00 3,375,000.00 4,950,000.00 11,700,000.00 12,600,000.00 14,850,000.00 After 60 days 4,320,000.00 2,160,000.00 2,025,000.00 2,970,000.00 After 90 days 2,880,000.00 1,440,000.00 1,350,000.00 1,980,000.00 Management 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 Expansion 14,000,000.00 13,300,000.00 5,700,000.00 Total Purchases 23,920,000.00 23,715,000.00 16,115,000.00 18,020,000.00 16,580,000.00 16,850,000.00 Other Payments Interest 342,760.00 Dividends 5,000,000.00 Fine on delay 54,000.00 99,000.00 61,312.50 70,875.00 49,500.00 Principal on loan 3,423,687.50 1,364,312.50 Total Other 54,000.00 99,000.00 3,485,000.00 1,435,187.50 5,049,500.00 342,760.00 Total Payments 23,974,000.00 23,814,000.00 19,600,000.00 19,455,187.50 21,629,500.00 17,192,760.00 Net cash 4,226,000.00 4,986,000.00 7,000,000.00 9,144,812.50 13,115,312.50 26,122,552.50 Cash flow budget if option was pursued BLACK DIAMOND MINING COMPANY CASH FLOW BUDGET FOR THE MONTHS OF: JANUARY TO JUNE 2016 Oct Nov Dec Jan Feb March April May June Sales 29,000,000.00 32,000,000.00 16,000,000.00 15,000,000.00 22,000,000.00 26,000,000.00 28,000,000.00 33,000,000.00 34,000,000.00 Opening bal 7,000,000.00 7,565,000.00 4,677,000.00 5,800,000.00 8,377,000.00 9,977,000.00 Cash Receipts’ Domestic cus' 9,285,000.00 10,062,000.00 9,240,000.00 15,600,000.00 16,800,000.00 19,800,000.00 inter' cus' 14,480,000.00 9,100,000.00 7,160,000.00 3,000,000.00 4,400,000.00 10,400,000.00 Overdraft 2,323,000.00 1,200,000.00 Total Receipts 30,765,000.00 26,727,000.00 23,400,000.00 25,600,000.00 29,577,000.00 40,177,000.00 Cash Payments 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 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 Expansion 14,000,000.00 13,300,000.00 5,700,000.00 Total Purchases 23,200,000.00 22,050,000.00 17,600,000.00 13,700,000.00 14,600,000.00 16,850,000.00 Other Payments Interest 187,380.00 Dividends 5,000,000.00 Principal on loan 3,523,000.00 Total Other 3,523,000.00 5,000,000.00 187,380.00 Total Payments 23,200,000.00 22,050,000.00 17,600,000.00 17,223,000.00 19,600,000.00 17,037,380.00 Net cash 7,565,000.00 4,677,000.00 5,800,000.00 8,377,000.00 9,977,000.00 23,139,620.00 Cash flow budget if no option was pursed (control budget) BLACK DIAMOND MINING COMPANY CASH FLOW BUDGET FOR THE MONTHS OF: JANUARY TO JUNE 2016 Oct Nov Dec Jan Feb March April May June Sales 29,000,000.00 32,000,000.00 16,000,000.00 15,000,000.00 22,000,000.00 26,000,000.00 28,000,000.00 33,000,000.00 34,000,000.00 Opening bal 7,000,000.00 5,000,000.00 6,750,000.00 7,000,000.00 14,650,000.00 20,650,000.00 Cash Reciepts Domestic cus' 9,600,000.00 9,000,000.00 13,200,000.00 15,600,000.00 16,800,000.00 19,800,000.00 inter' cus' 11,600,000.00 12,800,000.00 6,400,000.00 6,000,000.00 8,800,000.00 10,400,000.00 Overdraft 2,000,000.00 250,000.00 Total Receipts 28,200,000.00 28,800,000.00 26,600,000.00 28,600,000.00 40,250,000.00 50,850,000.00 Cash Payments 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 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 Expansion 14,000,000.00 13,300,000.00 5,700,000.00 Total Purchases 23,200,000.00 22,050,000.00 17,600,000.00 13,700,000.00 14,600,000.00 16,850,000.00 Other Payments Interest 101,616.00 Dividends 5,000,000.00 Principal on loan 2,000,000.00 250,000.00 Total Other 2,000,000.00 250,000.00 5,000,000.00 101,616.00 Total Payments 23,200,000.00 22,050,000.00 19,600,000.00 13,950,000.00 19,600,000.00 16,951,616.00 Net cash 5,000,000.00 6,750,000.00 7,000,000.00 14,650,000.00 20,650,000.00 33,898,384.00 Cash flow Budget if both the options are pursed. BLACK DIAMOND MINING COMPANY CASH FLOW BUDGET FOR THE MONTHS OF: JANUARY TO JUNE 2016 Oct Nov Dec Jan Feb March April May June Sales 29,000,000.00 32,000,000.00 16,000,000.00 15,000,000.00 22,000,000.00 26,000,000.00 28,000,000.00 33,000,000.00 34,000,000.00 Opening bal 7,000,000.00 5,000,000.00 6,750,000.00 7,000,000.00 14,650,000.00 20,650,000.00 Cash Reciepts Domestic cus' 9,600,000.00 9,000,000.00 13,200,000.00 15,600,000.00 16,800,000.00 19,800,000.00 inter' cus' 11,600,000.00 12,800,000.00 6,400,000.00 6,000,000.00 8,800,000.00 10,400,000.00 Overdraft 2,000,000.00 250,000.00 Total Receipts 28,200,000.00 28,800,000.00 26,600,000.00 28,600,000.00 40,250,000.00 50,850,000.00 Cash Payments 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 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 2,000,000.00 Expansion 14,000,000.00 13,300,000.00 5,700,000.00 Total Purchases 23,200,000.00 22,050,000.00 17,600,000.00 13,700,000.00 14,600,000.00 16,850,000.00 Other Payments Interest 101,616.00 Dividends 5,000,000.00 Principal on loan 2,000,000.00 250,000.00 Total Other 2,000,000.00 250,000.00 5,000,000.00 101,616.00 Total Payments 23,200,000.00 22,050,000.00 19,600,000.00 13,950,000.00 19,600,000.00 16,951,616.00 Net cash 5,000,000.00 6,750,000.00 7,000,000.00 14,650,000.00 20,650,000.00 33,898,384.00 Read More