Cash Collection Schedule Analysis - Chicago Electronics Pty Ltd - Case Study Example

Chicago Electronics Pty Ltd Report to the chief finance officer on cash collection schedule analysis Introduction This report is prepared to the company’s chief finance officer. The report is aimed at explaining to the chief finance officer the amount of money that the company can expect to collect for the period between March and August 2015 given its current cash collection policy. The company’s current cash collection policy is such that the company makes all sales in credit with 30% of the sales expected to be collected within the month the sale is made. 40% of the sales revenue is collected within one month after the sale while 20% of the sales revenue is collected two months after the sale has been made. It should however be noted that 10% of the sales revenue will remain uncollectible and hence this is treated as bad debts. Thus, this report is aimed at breaking down how the company can expect to collect its ash receivables given the above receivables collection policy. In this regard, it is expected that the chief finance officer will always be able to know how much cash the company can expect to have at any given month and hence be able to better plan for its usage. As such, this report will break down cash collection expectations for the six months period including the amount of bad debts for each month, the cash collected and the amount of cash expected to be collected later in September and October. It should also be noted that some of the cash collection in the report refers to the sales made in January and February 2015 as shown in working 1 on the attached excel file. This report will also aim at explaining to the chief finance officer the importance of the company having such a cash collection schedule analysis with respect to aiding the company in prudent financial management. Report overview In the cash collection schedule analysis in the excel file attached, it is established that the company will be able to collect the following amounts of money from March to October using the cash collection policy explained above. Month Expected collection March $23,100 April $24,000 May $23,000 June $23,000 July $26,500 August $30,800 Total collection for the period $150,400 Note that the above cash collection are based on the company’s cash collection experience and hence policy and on the amount of sales that the company made in January and February as well as its sales expectations for the period between March and August. Based on the same cash collection policy, the following amounts will remain uncollected at the end of the period. Note that these amounts relate to both bad debts and the amounts expected to be collected in September and October in respect to the July and August sales. Month Cash expected to remain uncollected March $2,500 April $3,000 May $2,000 June $3,000 July $10,500 August $25,200 Totals $46,200 As such, of the sales expected to be made during the six months from March through august, $46,200 will still be uncollected at the end of August. Of this, $28,600 is expected to be collected later. This relates to 20% ($7,000) of July sales that is expected to be collected in September. It also relates to 40% ($14,400) of August sales expected to be collected in the month of September and 20% ($7,200) sales of August sales that is expected to be collected in October. It is worth noting that the rest of the money amounting to $17,600 refers to bad debts and hence it will remain uncollectible. The strengths and weaknesses of cash collection analysis for the company Analyzing the amount of cash that the company expects to collect from its various sources is very important for the company in a bid to ensure prudent financial management. Some of the strengths of such an analysis include the fact that the company is always able to know the amount of money it can expect to receive from its various sources at any given time. With this knowledge in mind, the company can then be able to wisely plan how these cash collections will be used in paying its current financial obligations as well as in its day to day operations. This way, there will be no time that the company will find that it has used all its cash yet some of its expenses have not been met. In other words, it helps the company in spending within its means. This kind of analysis would also help the company in prioritizing projects where projects that consume a lot of cash can be undertaken in the months when the company expects to have the required cash. In the same way, when the company has some debts that it is paying, the company can be able to better schedule its debts so that they are prioritized according to the company’s cash availability. Where the company through the analysis has anticipated that there will not be enough cash to meet all its financial obligations and also fund its ongoing projects, the company can be able to better schedule its borrowings when it knows how much it needs to borrow and its ability to repay both debts and interest thereof. Despite the above strengths of such an analysis, it also has some weaknesses. One of the weaknesses is that the figures used in the analysis remain just estimates of what is expected to happen in future. For instance, the company in this case may have its operations affected by the country’s general economic performance. In this case, there is no guarantee that the company will make the anticipated sales. In the same vein, the debtors may also be affected which may affect their ability to pay in accordance to expectations. For instance, bad economic performance may mean the debtors being unable to pay on time and hence the whole cash collection expectations being distorted. In the same vein, the company’s spending and hence operations will be affected if it was solely based on the analysis. The bad debts can increase more than the anticipated level thus putting the company’s operations and hence reputation in jeopardy. 2. Profit margin 2013 Profit margin Profit margin ratio = Net income/Net sales Net income = $700,000 Net sales =$4,000,000 Profit margin ratio = $700,000/$4,000,000 Profit margin ratio = 17.50% 2014 profit margin Income statement Omega Freshwater Income statement For the year ended 30th June 2014 Sales ($4,000,000 *1.12) $4,480,000 Cost of goods sold ($2,100,000 *1.25) $2,625,000 Gross profit $1,855,000 Selling and administrative expenses $750,000 Operating profit $1,105,000 Interest expense $150,000 Income before taxes $955,000 Taxes (30%) $286,500 Income after taxes $668,500 Profit margin Profit margin ratio = Net income/Net sales Net income = $668,500 Net sales =$4,480,000 Profit margin ratio = $668,500/$4,480,000 Profit margin ratio = 14.92% a) Income after taxes for 2014 is $668,500 b) Profit margin ratio for 2014 is 14.92% Read More