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ADM 3313 Lecture Notes - Lecture 14: Cash Flow, Promotional Mix, Cash Flow Statement

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School
University of Ottawa
Department
Administration
Course
ADM 3313
Professor
Barbara Orser

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Document Summary

> justification of your revenue & expenses projections. > be able to explain each account line in your cash flow. Consider the following factors when you are compiling your numbers: Most of your costs are rarely the same every month. Your revenue projections are probably the most critical, yet difficult, aspects of completing an accurate cash flow statement. Consider the following factors when putting your numbers together: > if you have a sales history, go back and use those figures to help guide your projections. > your promotional mix activities can have a direct impact on your revenues. > seasonality factors may influence the increase or decrease of revenues. > ensure that your projected growth rate is realistic for a new business entering the market place. > monitor the competition- your revenues maybe influenced by their activity. > continuously monitor current market conditions so you may react to changes in the industry (trends, gaps/needs, target market, competition)

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Related Questions

Peyton Department Store prepares budgets quarterly. Thefollowing information is available for use in planning the secondquarter budgets for 2014.

PEYTON DEPARTMENTSTORE
Balance Sheet
March 31, 2014
Assets Liabilities andStockholders' Equity
Cash $ 3,000 Accounts payable $26,000
Accounts receivable 25,000 Dividends payable 17,000
Inventory 30,000 Rent payable 2,000
Prepaid Insurance 2,000 Stockholders' equity 40,000
Fixtures 25,000
Total assets $85,000 Total liabilities and equity $85,000

Actual and forecasted sales for selected months in 2014 are asfollows:

Month Sales Revenue
January $ 60,000
February 50,000
March 40,000
April 50,000
May 60,000
June 70,000
July 90,000
August 80,000

Monthly operating expenses are as follows:

Wages and salaries $ 25,000
Depreciation 100
Utilities 1,000
Rent 2,000

Cash dividends of $17,000 are declared during the third month ofeach quarter and are paid during the first month of the followingquarter. Operating expenses, except insurance, rent, anddepreciation are paid as incurred. Rent is paid during thefollowing month. The prepaid insurance is for five more months.Cost of goods sold is equal to 50 percent of sales. Endinginventories are sufficient for 120 percent of the next month'ssales. Purchases during any given month are paid in full during thefollowing month. All sales are on account, with 50 percentcollected during the month of sale, 40 percent during the nextmonth, and 10 percent during the month thereafter. Money can beborrowed and repaid in multiples of $1,000 at an interest rate of12 percent per year. The company desires a minimum cash balance of$3,000 on the first of each month. At the time the principal isrepaid, interest is paid on the portion of principal that isrepaid. All borrowing is at the beginning of the month, and allrepayment is at the end of the month. Money is never repaid at theend of the month it is borrowed.

(a) Prepare a purchases budget for each month of the secondquarter ending June 30, 2014.

Peyton DepartmentStore
Monthly Purchase Budget
Quarter Ending June 30, 2014
April May June Total
Budgeted purchases $Answer $Answer $Answer $Answer

(b) Prepare a cash receipts schedule for each month of thesecond quarter ending June 30, 2014. Do not include borrowings.

Peyton DepartmentStore
Schedule of Monthly Cash Receipts
Quarter Ending June 30, 2014
April May June Total
Total cash receipts $Answer $Answer $Answer $Answer

(c) Prepare a cash disbursements schedule for each month of thesecond quarter ending June 30, 2014. Do not include repayments ofborrowings.

Peyton DepartmentStore
Schedule of Monthly Cash Disbursements
Quarter Ending June 30, 2014
April May June Total
Total cash disbursements $Answer $Answer $Answer $Answer

(d) Prepare a cash budget for each month of the second quarterending June 30, 2014. Include budgeted borrowings andrepayments.

Only use negative signs, if needed, for: excess receiptsover disbursements, balance before borrowings and cash balances(beginning and ending).

Peyton Department
Store Monthly Cash Budget
Quarter Ending June 30, 2014
April May June Total
Cash balance, beginning $Answer $Answer $Answer $Answer
Receipts Answer Answer Answer Answer
Disbursements Answer Answer Answer Answer
Excess receipts over disb. Answer Answer Answer Answer
Balance before borrowings Answer Answer Answer Answer
Borrowings Answer Answer Answer Answer
Loan repayments Answer Answer Answer Answer
Cash balance, ending $Answer $Answer $Answer $Answer

(e) Prepare an income statement for each month of the secondquarter ending June 30, 2014.

Only use negative signs to show net losses forincome.

Peyton DepartmentStore
Budgeted Monthly Income Statements
Quarter Ending June 30, 2014
April May June Total
Sales $Answer $Answer $Answer $Answer
Cost of sales Answer Answer Answer Answer
Gross profit Answer Answer Answer Answer
Operating expenses:
Wages and salaries Answer Answer Answer Answer
Depreciation Answer Answer Answer Answer
Utilities Answer Answer Answer Answer
Rent Answer Answer Answer Answer
Insurance Answer Answer Answer Answer
Interest Answer Answer Answer Answer
Total expenses Answer Answer Answer Answer
Net income $Answer $Answer $Answer $Answer

(f) Prepare a budgeted balance sheet as of June 30, 2014.

Peyton DepartmentStore
Budgeted Balance Sheet
June 30, 2014
Assets Liabilities andEquity
Cash $Answer Merchandise payable $Answer
Accounts receivable Answer Dividend payable Answer
Inventory Answer Rent payable Answer
Prepaid insurance Answer Loans payable Answer
Fixtures Answer Interest payable Answer
Total assets $Answer Stockholders' equity Answer
Total liab. & equity $Answer

Flexible Budget for Selling and Administrative Expenses for aService Company

Morningside Technologies Inc. uses flexible budgets that arebased on the following data:

Sales commissions 7% of sales
Advertising expense 25% of sales
Miscellaneous administrative expense $1,850 per month plus 3% of sales
Office salaries expense $17,000 per month
Customer support expenses $2,600 plus 4% of sales
Research and development expense 5,750 per month

Prepare a flexible selling and administrative expenses budgetfor April for sales volumes of $115,000, $145,000, and $175,000.Enter all amounts as positive numbers.

Morningside Technologies Inc.
Flexible Selling and Administrative ExpensesBudget
Forthe Month Ending April 30
Total sales $115,000 $145,000 $175,000
Variable cost:
Sales commissions $ $ $
Advertising expense
Miscellaneousadministrative expense
Customer support expense
Total variable cost $ $ $
Fixed cost:
Miscellaneous administrative expense $ $ $
Office salaries expense
Customer support expense
Research and development expense
Total fixed cost $ $ $
Total selling and administrativeexpenses $ $

$

2.

Sales and Production Budgets

Sonic Inc. manufactures two models of speakers, Rumble andThunder. Based on the following production and sales data for June,prepare (a) a sales budget and (b) a production budget.

Rumble Thunder
Estimated inventory (units), June 1 278 77
Desired inventory (units), June 30 319 67
Expected sales volume (units):
East Region 4,100 4,600
West Region 5,000 4,350
Unit sales price $115 $185

a. Prepare a sales budget.

SonicInc.
SalesBudget
Forthe Month Ending June 30



Product and Area		 Unit
Sales
Volume		 Unit
Selling
Price		 Total
Sales
Model Rumble:
East Region $ $
West Region
Total $
Model Thunder:
East Region $ $
West Region
Total $
Total revenue from sales $

3.

Cash Budget

The controller of Sonoma Housewares Inc. instructs you toprepare a monthly cash budget for the next three months. You arepresented with the following budget information:

May June July
Sales $90,000 $111,000 $142,000
Manufacturing costs 38,000 48,000 51,000
Selling and administrative expenses 26,000 30,000 31,000
Capital expenditures _ _ 34,000

The company expects to sell about 10% of its merchandise forcash. Of sales on account, 60% are expected to be collected in themonth following the sale and the remainder the following month(second month following sale). Depreciation, insurance, andproperty tax expense represent $9,000 of the estimated monthlymanufacturing costs. The annual insurance premium is paid inSeptember, and the annual property taxes are paid in November. Ofthe remainder of the manufacturing costs, 75% are expected to bepaid in the month in which they are incurred and the balance in thefollowing month.

Current assets as of May 1 include cash of $34,000, marketablesecurities of $49,000, and accounts receivable of $107,800 ($79,000from April sales and $28,800 from March sales). Sales on accountfor March and April were $72,000 and $79,000, respectively. Currentliabilities as of May 1 include $10,000 of accounts payableincurred in April for manufacturing costs. All selling andadministrative expenses are paid in cash in the period they areincurred. An estimated income tax payment of $13,000 will be madein June. Sonoma’s regular quarterly dividend of $9,000 is expectedto be declared in June and paid in July. Management wants tomaintain a minimum cash balance of $27,000.

Required:

1. Prepare a monthly cash budget and supportingschedules for May, June, and July. Input all amounts as positivevalues except overall cash decrease and deficiency which should beindicated with a minus sign.

Sonoma Housewares Inc.
CashBudget
Forthe Three Months Ending July 31
May June July
Estimated cash receipts from:
Cash sales $ $ $
Collection of accounts receivable
Total cash receipts $ $ $
Estimated cash payments for:
Manufacturing costs $ $ $
Selling and administrative expenses
Capital expenditures
Other purposes:
Income tax
Dividends
Total cash payments $ $ $
Cash increase or (decrease) $ $ $
Cash balance at beginning of month
Cash balance at end of month $ $ $
Minimum cash balance
Excess or (deficiency) $ $ $

4.

Factory Overhead Cost Budget

Sweet Tooth Company budgeted the following costs for anticipatedproduction for August:

Advertising expenses $259,400
Manufacturing supplies 14,220
Power and light 42,400
Sales commissions 290,020
Factory insurance 24,690
Production supervisor wages 124,710
Production control wages 32,420
Executive officer salaries 264,390
Materials management wages 35,670
Factory depreciation 20,210

Prepare a factory overhead cost budget, separating variable andfixed costs. Assume that factory insurance and depreciation are theonly fixed factory costs.

SweetTooth Company
Factory Overhead Cost Budget
Forthe Month Ending August 31
Variable factory overhead costs:
Manufacturingsupplies $
Power and light
Production supervisorwages
Production controlwages
Materials managementwages
Total variable factory overhead costs $
Fixed factory overhead costs:
Factory insurance $
Factory depreciation
Total fixed factory overhead costs
Total factory overhead costs $

Develop a high-level funding schedule for a new venture business concept that can be used to discuss cash requirements for the first year of operations with prospective investors. The schedule should be prepared on a monthly basis and should include the following specific details:

(1.) Headcount plan - including all personnel needed to carry out the critical operations of the business for the upcoming year.

(2.) Forecast general & administrative expenses, including office rent and related costs, utilities, communication expenses, insurance, filing fees, etc.

(3.) Estimate the cost of how you plan to market the company/product.

(4.) Develop your revenue model, including key assumptions and variables such as unit sales, sales growth, number of customers by the end of the year, product pricing, etc., Make the model flexible enough to enable you to change key variables and run “what if” analyses.

(5.) If the cost of delivering your product of service is significant, forecast the cost of goods sold based upon estimate costs and the product assumptions used in item 4 above.

(6.) After preparing the initial financial plan, critically review the plan and assumptions (including having advisors and other management team members review the plan for reasonableness). Adjust the month-to-month results to “normalize” the cash balance (and ensure it never runs below $0), adjusting discretionary expenses if necessary.

(It can be any business venture as in a resturant or a store)

Upon completion of the financial model, answer the following questions:

Question 1

How much cash do you need to raise to operate during the first 12 months of operations? Please include your numeric answer and an explanation of several sentences. (about 150 words)

Question 2

Does the amount of cash needed in item 1 above fall within the “reasonableness range” for an early stage company (i.e., up to $5 million)? Please include your numeric answer and an explanation of several sentences. (about 150 words)

Question 3

What is your monthly cash burn rate - both gross and net burn (gross burn is the average of total expenses each month; net burn is gross burn offset by the average monthly cash generated from revenues). Please include your numeric answer and an explanation of several sentences. (about 150 words)

Question 4

How long will you be able to operate at the end of the 12 months forecast before you need to raise additional funding? Please include your numeric answer and an explanation of several sentences. (about 150 words)

Question 5

Please attach a copy of the Financial Model that you created for this assignment.

EXAMPLE

How much cash do you need to raise to operate during the first 12 months of operations? Please include your numeric answer and an explanation of several sentences.

As I plan to operate a restaurant with a nice ambiance I would require premises, renovation and internal decor, furniture, electric setup, a couple of computers, staff, their uniforms, chefs, food supply, tables, chairs and couches, brochures and menu cards, marketing and advertising. Premises and land= $196.3K Renovation and internal decor= $49K Furniture, tables and chair= $20K Staff(2 waiters 1 on the counter 2 cooks)= $16K Uniforms, brochures, menu cards= $500 Food supply= Everyday return, so not included. Marketing and advertising= $20K


Does the amount of cash needed in item 1 above fall within the “reasonableness range” for an early stage company (i.e., up to $5 million)? Please include your numeric answer and an explanation of several sentences.

Total required amount is $301.8K which falls under the reasonable range.

What is your monthly cash burn rate - both gross and net burn (gross burn is the average of total expenses each month; net burn is gross burn offset by the average monthly cash generated from revenues). Please include your numeric answer and an explanation of several sentences.

Three workers at $200 per month and two workers of $300 per month (That's what the salaries are where I live). $1,200 salary, $300 for the electric, maintenance, gas and marketing etc every month. If in the starting months 20 people visits the restaurant and spends at least 7$ per person on food on average, they would bring $140 revenue everyday and in 30 days, $4,200, which is the revenue generated including 60% profit that the food items would generate. $2625 on the food that is being sold. A total of $4,125 is expected to be spent in the first few months, which is the gross burn. The $2,625 food that is sold will at least give 60% profit, that's calculated to be $1575. So the revenue earned each month for a first few months would be $4,200. This estimates that the net burn would be something around (4,125-4200) viz "-$75" every month for a first few months. The negative sign shows it's a profit, and that even at the estimated value their would be some room (of $75) for the accounts to balance and the venture to not fall off into loss. This is the minimum sale calculation which shows no loss. 20 people to visit in one day is a very small figure. Such a business offers an everyday recovery.

How long will you be able to operate at the end of the 12 months forecast before you need to raise additional funding? Please include your numeric answer and an explanation of several sentences.


As we will start gaining more costumers due to marketing and best quality provided, we will start making wholesome profits. At the rate of 50 costumers per day shopping at the average of $8 per costumer, we would make a revenue of $400 per day and $12,000 per month, which after deduction of food cost and other bills would give a profit of $3,000 every month, and hopefully at the end of the 12th month we will be making $6000 per month. Such a profit will help recovering the amount invested and in a few more months the business will be able to recover all the investment except the cost of the land and premises, which will of course be there as an asset.