Cash flow analysis

The cash flow policy of keeping minimum cash balance of $50,000 will be infringed in all months with the exception of November in which a cash balance of $182,250 will be attained. The organization also commenced trading in March 2004 and therefore the utility of credit policies to maintain the cash policy will be to reach cash sales of 24%. This is however not advisable, since strict credit control procedures will refrain the market penetration strategy that the company should adopt at this introductory stage of the product life.
In this respect, the firm should utilize outside financing mediums like a bank overdraft facility. Question C The minimum line of credit that Cyrus Brown Manufacturing requires in order to keep the cash balance at least at $50,000 in all months is $213,750 as shown in the second worksheet. This amount is particularly high namely due to the net cash outflow envisaged in June amounting to $128,250. Such significant cash outflow arose due to the capital expenditure and income tax payments incurred.
Apart from the month of June, Cyrus Brown Manufacturing will incur a net cash outflow during the first two months of operations, which shall amount to $35,000 and $57,500 as portrayed in the Cash Budget prepared. Even thought they are a net cash outflow they are not of a particular concern to the organization. This is due to the fact that such outflows are arising since the 25% receipt from sales will not be attained in April and both the 65% and 25% receipt from sales will not be achieved in March since the company commenced trading in that period.

Once all the credit sales will be achieved, the firm will commence making net cash inflows in all the months planned except June. Indeed the area of concern arises mainly for the month of June, in which the net cash outflow is very significant as already pointed out in the previous question. This high amount arose due to the capital expenditure and the taxation payments, which incurred simultaneously on that date. The income tax per se is not advisable to be paid in another month, since the company will be penalized fines and interest by the Inland Revenue Department if they refrain from paying the tax o time.
With respect to the capital expenditure I suggest that this payment is postponed to a later date, namely in November, in which the cash balance is materially high reaching $182,250. If the organization needs such long-term assets before, since it will aid the efficiency of the firm’s operations or due to other similar reasons, there are other possible solutions that could be adopted. The company, for example could purchase the plant on credit and negotiate a five month credit term after the month of purchase. If this is not plausible, external sources of finance could be utilized, such as a short-term loan.
If one of the above remedies is adopted, the minimum line of credit would be significantly diminished and the company would be capable to maintain the cash balance policy and incur lower interest payments by controlling the overdraft balance. Question E A bank manager, when assessing a client for his credit worthiness, would normally look at the ability of the client to make interest payments on time and the going concern of the business. The cash budget prepared shows that the cash flow of the organization will improve over the months leading to a significantly high cash balance at the end of the nine month budget.
This means that it is expected that the business will prosper and enhance the financial wealth of the firm. In this respect, the ability of the company to meet interest commitments is good together with a low risk of bankruptcy that new firms particularly at the first months of operations. In this respect, a bank manager would be pleased to have Cyrus Brown Manufacturing as his client.
Drury C. (1996). Management and Cost Accounting. Fourth Edition. New York: International Thomson Business Press. Lucey T. (2003). Management Accounting. Fifth Edition. Great Britain: Biddles Limited.

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