Scenario Your family business is expanding. Based on your experience and in depth knowledge of the market, you have estimated the following results for the first 2 years (8 quarters) of the project. Expected revenues for the first two years are as follows. o In addition, sales for the 1* quarter of Year 3 are projected at $520,000. Year 1/00052 Year 2000) 01 02 03 04 02 03 04 40 72|1281601224 280 352 440 General and administrative expenses (wages, taxes, office etc.) are estimated to be 15% of sales. Sales salaries and commissions are estimated to be 10% of sales. Accounts receivable at the beginning of this expansion are $0. o Collection period = 30 days Accounts payable at the beginning of the expansion are SO. o The Company quarterly purchases from suppliers = 60% of the next quarter's forecasted sales. o Suppliers are paid on average in 60 days. You will need to buy new equipment & furniture in both Year 1-Q1 and Year 1-Q4 for $40,000 ($80,000 total in Year 1). To help start the expansion you have secured an initial cash loan from the bank of $80,000. Interest on this loan is $2,400 per quarter. The company will pay back the full $80,000 in the Year 2-Q4. Interest on any additional short-term borrowing is expected to be 3% per quarter. The Company wishes to maintain an $80,000 minimum balance at all times to best manage its working capital and any unexpected commitments. Question! 1. From above, does the company require any short-term financing? Explain. (50 - 100 words) a. If so, use the template in Appendix B to build a Short-Term Financing Plan. 2. What are your thoughts on the viability of the expansion? Consider a. Both the above budgets Appendix A- Cash Budget Year 1 (-000s) Q2 Q3 Year 2 ('000) 02 Q3 Q1 04 Q1 04 Cash Collections Beginning A/R Sales Collection of accounts Ending A/R 0 13,333 24,000 42,667 53,333 74,667 93,333 117,333 40,000 72,000 128,000 160,000 224.000 280,000 352,000 440,000 26,667 161,333 109,333 149,333 202,667 261,333 328,000 410,667 13,333 24,000 42,667 53,333 | 74,667 93,333 117,333 146,667 Cash Disbursements Beginning A/P Purchases Paid A/P Ending A/P 0 28,800 51,200 64,000 89,600 112,000 140,800 176,000 43,200 76,800 96,000 134,400 | 168,00 211,200 264,000 312,000 14,400 54,400 83,200 108,800 145,600 182,400 228,800 280,000 28,800 51,200 64,000 89,600 112,000 140,800 176,000 208,000 Total Cash Outflows Paid A/P 14,400 54,400 83,200 108,800 145,600 182,400 228,800 280,000 General & admin. Expenses 6,000 10,800 19,200 24,000 33,600 42,000 52,800 66,000 Sales salaries & 14,000 7,200 12,800 16,000 22,400 28,000 35,200 44,000 commissions Capital expenditures |40,000 40,000 Loan Repayment 80,000 Loan Interest 2,400 2,400 2,400 2.400 2,400 2,400 2,400 2,400 Additional interest for 1,204 1,644 1,941 3,256 Shortterm add-I borrowing 3,393 3,299 3,134 Total cash disbursements 66,800 76,004 119,244 193,141 207,256 258,193 322,499 475,534 Net Cash Flows Beginning cash balance 80,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000 Total cash collections 26,667 61,333 109,333 149,333 202,667 261,333 328,000 410,667 Total cash disbursements 66,800 76,004 119,244 193,141 207,256 258,193 322,499 475,534 Net cash inflow 40,133 14,671 9,911 43,808 4,589 3,140 5,501 64,867 Ending cash balance 39,867 165,329 70,089 36,192 75,411 | 83,140 85,501 15,133 Minimum cash balance 80,000 80,000 80,000 80,000 80,000 80,000 80.000 80.000 Cumulative surplus (deficit) 40,133 54,80464,715 108,523 113,112 109,972 104,471 169,339 Add-I Shortterm 40,133 14,671 9,911 43,808 4,589 3,1401 5,501 64,867 borrowing/repayment Appendix B - Short-Term Financing Plan Year 1 (000s) Year 2 (000s) 0102030401 02 03 04 Beginning cash balance Net cash flow Ending Cash Balance (before borrowing or repayment) Interest on exiting short-term borrowing New required short-term borrowing Short-term borrowing repaid Ending Cash Balance (after borrowing or repayment) Minimum cash balance Cumulative surplus (deficit) Beginning short-term debt Change in short-term debt Ending short-term debt Scenario Your family business is expanding. Based on your experience and in depth knowledge of the market, you have estimated the following results for the first 2 years (8 quarters) of the project. Expected revenues for the first two years are as follows. o In addition, sales for the 1* quarter of Year 3 are projected at $520,000. Year 1/00052 Year 2000) 01 02 03 04 02 03 04 40 72|1281601224 280 352 440 General and administrative expenses (wages, taxes, office etc.) are estimated to be 15% of sales. Sales salaries and commissions are estimated to be 10% of sales. Accounts receivable at the beginning of this expansion are $0. o Collection period = 30 days Accounts payable at the beginning of the expansion are SO. o The Company quarterly purchases from suppliers = 60% of the next quarter's forecasted sales. o Suppliers are paid on average in 60 days. You will need to buy new equipment & furniture in both Year 1-Q1 and Year 1-Q4 for $40,000 ($80,000 total in Year 1). To help start the expansion you have secured an initial cash loan from the bank of $80,000. Interest on this loan is $2,400 per quarter. The company will pay back the full $80,000 in the Year 2-Q4. Interest on any additional short-term borrowing is expected to be 3% per quarter. The Company wishes to maintain an $80,000 minimum balance at all times to best manage its working capital and any unexpected commitments. Question! 1. From above, does the company require any short-term financing? Explain. (50 - 100 words) a. If so, use the template in Appendix B to build a Short-Term Financing Plan. 2. What are your thoughts on the viability of the expansion? Consider a. Both the above budgets Appendix A- Cash Budget Year 1 (-000s) Q2 Q3 Year 2 ('000) 02 Q3 Q1 04 Q1 04 Cash Collections Beginning A/R Sales Collection of accounts Ending A/R 0 13,333 24,000 42,667 53,333 74,667 93,333 117,333 40,000 72,000 128,000 160,000 224.000 280,000 352,000 440,000 26,667 161,333 109,333 149,333 202,667 261,333 328,000 410,667 13,333 24,000 42,667 53,333 | 74,667 93,333 117,333 146,667 Cash Disbursements Beginning A/P Purchases Paid A/P Ending A/P 0 28,800 51,200 64,000 89,600 112,000 140,800 176,000 43,200 76,800 96,000 134,400 | 168,00 211,200 264,000 312,000 14,400 54,400 83,200 108,800 145,600 182,400 228,800 280,000 28,800 51,200 64,000 89,600 112,000 140,800 176,000 208,000 Total Cash Outflows Paid A/P 14,400 54,400 83,200 108,800 145,600 182,400 228,800 280,000 General & admin. Expenses 6,000 10,800 19,200 24,000 33,600 42,000 52,800 66,000 Sales salaries & 14,000 7,200 12,800 16,000 22,400 28,000 35,200 44,000 commissions Capital expenditures |40,000 40,000 Loan Repayment 80,000 Loan Interest 2,400 2,400 2,400 2.400 2,400 2,400 2,400 2,400 Additional interest for 1,204 1,644 1,941 3,256 Shortterm add-I borrowing 3,393 3,299 3,134 Total cash disbursements 66,800 76,004 119,244 193,141 207,256 258,193 322,499 475,534 Net Cash Flows Beginning cash balance 80,000 80,000 80,000 80,000 80,000 80,000 80,000 80,000 Total cash collections 26,667 61,333 109,333 149,333 202,667 261,333 328,000 410,667 Total cash disbursements 66,800 76,004 119,244 193,141 207,256 258,193 322,499 475,534 Net cash inflow 40,133 14,671 9,911 43,808 4,589 3,140 5,501 64,867 Ending cash balance 39,867 165,329 70,089 36,192 75,411 | 83,140 85,501 15,133 Minimum cash balance 80,000 80,000 80,000 80,000 80,000 80,000 80.000 80.000 Cumulative surplus (deficit) 40,133 54,80464,715 108,523 113,112 109,972 104,471 169,339 Add-I Shortterm 40,133 14,671 9,911 43,808 4,589 3,1401 5,501 64,867 borrowing/repayment Appendix B - Short-Term Financing Plan Year 1 (000s) Year 2 (000s) 0102030401 02 03 04 Beginning cash balance Net cash flow Ending Cash Balance (before borrowing or repayment) Interest on exiting short-term borrowing New required short-term borrowing Short-term borrowing repaid Ending Cash Balance (after borrowing or repayment) Minimum cash balance Cumulative surplus (deficit) Beginning short-term debt Change in short-term debt Ending short-term debt