Free Essay On Cash Flow And Financial Planning

Question 1: outside financing

Cash budgets show the receipts and payments of cash expected over a budget period. It is one of the most important management tool for planning and control (BPP, 2009, p. 279). If the cash budget shows potential cash deficits to take place in future, then the management has to take action to avoid the problems either by modifying related plans (such as sales, expenditure, working capital policies) or by arranging external financing.

Question 2: minimum line of credit for CBM

The company needs to maintain at least $ 50 000 in its cash balances through the period.
Taking this condition into account, the foregoing tables demonstrates that the maximum utilization of external financing is to take place in June at the value of $ 415 000. Allowing for interest and possible inaccuracies in projections, it is recommended to top this amount by 5% to $ 436 000, which is the minimum line of credit which CBM will need.

Question 3: CBM cash position

Though the company appears to operate profitably, the analysis of cash flows of CBM evidences considerable cash deficits during 6 months period. Starting from a small deficit of $ 108 thd it reaches its peak of $ 365 thd in June before going into surplus in October. This could be explained by the working capital cycle of the company. The management of working capital is an important aspect of the planning (Atrill et al, 2009, p. 411). Whereas cash receipts are extended for 2 months following the sales, its payments are made on the month of sale or earlier. Perhaps it is attributable to the need to purchase raw materials in advance for manufacturing. This leads to deficits building up and some concerns about CBM cash position. As Hope (2006,) asserts business needs to ensure sufficient free cash flows to ensure debt repayment, dividends for shareholders and re-investing in business. However, the free cash flow of CBM estimated as projected cash surplus of $ 106 thd as at the end of November is rather tight.

Question 4: CBM as a bank’s client

The bank is interested in having profitable businesses as its clients which take credits and are able to repay them with interest. The cash flow analysis does not give us full picture of CBM’s profitability, however, a simple calculation can provide an idea of it:
*Operating expenditure is total cash payments $ 3 742 thd adjusted for plant purchase of $ 95 thd as it is accounted for under depreciation.
Net margin is about 5% which might be a little bit thin for a new venture. Therefore, the risk of non-repayment of the loan might be higher, than it is acceptable for the bank. Therefore, as a bank manager, I would not recommend CBM as a client.

References

Atrill, P. & McLaney, E. (2009). Management accounting for decision makers. Pearson
Education.
BPP (2009). CIMA - P1: Management Accounting: Performance Evaluation. UK :
BPP Learning.
Hope, J. (2006). Reinventing the CFO. How Financial Managers Can Transform Their Roles
and Add G reater Value. Harvard Business School Press, Boston.