Start with the partial model in the file attached. Marvel Pence, CEO of Marvel’s Renovations, a custom building and repair company, is preparing documentation for a line of credit request from his commercial banker. Among the required documents is a detailed sales forecast for parts of 2020 and 2021: Sales Labor and Raw Materials May, 2020 $75,000 $80,000 June, 2020 $115,000 $75,000 July, 2020 $145,000 $105,000 August, 2020 $125,000 $85,000 September, 2020 $120,000 $65,000 October, 2020 $95,000 $70,000 November, 2020 $75,000 $30,000 December, 2020 $55,000 $35,000 January, 2021 $45,000 N/A Estimates obtained from the credit and collection department are as follows: collections within the month of sale, 20%; collections during the month following the sale, 60%; collections the second month following the sale, 25%. Payments for labor and raw materials are typically made during the month following the one in which these costs were incurred. Total costs for labor and raw materials are estimated for each month as shown in the table. General and administrative salaries will amount to approximately $25,000 a month; lease payments under long-term lease contracts will be $7,000 a month; depreciation charges will be $8,000 a month; miscellaneous expenses will be $5,000 a month; income tax payments of $30,000 will be due in both August and December; and a progress payment of $95,000 on a new office suite must be paid in October. Cash on hand on July 1 will amount to $70,000, and a minimum cash balance of $30,000 will be maintained throughout the cash budget period. c. If its customers began to pay late, this would slow down collections and thus increase the required loan amount. Also, if sales dropped off, this would have an effect on the required loan amount. Perform a sensitivity analysis that shows the effects of these two factors on the maximum loan requirement.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Start with the partial model in the file attached. Marvel Pence, CEO of Marvel’s Renovations, a custom building and repair company, is preparing documentation for a line of credit request from his commercial banker. Among the required documents is a detailed sales forecast for parts of 2020 and 2021:

	Sales	Labor and Raw Materials
May, 2020	$75,000	$80,000
June, 2020	$115,000	$75,000
July, 2020	$145,000	$105,000
August, 2020	$125,000	$85,000
September, 2020	$120,000	$65,000
October, 2020	$95,000	$70,000
November, 2020	$75,000	$30,000
December, 2020	$55,000	$35,000
January, 2021	$45,000	N/A

Estimates obtained from the credit and collection department are as follows: collections within the month of sale, 20%; collections during the month following the sale, 60%; collections the second month following the sale, 25%. Payments for labor and raw materials are typically made during the month following the one in which these costs were incurred. Total costs for labor and raw materials are estimated for each month as shown in the table. General and administrative salaries will amount to approximately $25,000 a month; lease payments under long-term lease contracts will be $7,000 a month; depreciation charges will be $8,000 a month; miscellaneous expenses will be $5,000 a month; income tax payments of $30,000 will be due in both August and December; and a progress payment of $95,000 on a new office suite must be paid in October. Cash on hand on July 1 will amount to $70,000, and a minimum cash balance of $30,000 will be maintained throughout the cash budget period.

c. If its customers began to pay late, this would slow down collections and thus increase the required loan amount. Also, if sales dropped off, this would have an effect on the required loan amount. Perform a sensitivity analysis that shows the effects of these two factors on the maximum loan requirement.

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43 Total payments
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45 Net Cash Flows
46 Cash on hand at start of forecast period
47 Net cash flow (NCF): Total collections – Total payments
48 Cumulative NCF: Prior month cumulative + this month's NCF
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50 Cash Surplus (or Loan Requirement)
51 Target cash balance
52 Surplus cash or loan needed: Cum NCF – Target cash
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Max. Loan
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56 b. Prepare an estimate of the required financing (or excess funds)-that is, the amount of money
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64 e. If its customers began to pay late, this would slow down collections and thus increase the required loan amount.
65 Also, if sales dropped off, this would have an effect on the required loan. Do a sensitivity analysis that shows the effects
66 of these two factors on the max loan requirement. Assume the purchases of labor and raw material also vary by the
67 sales adjustment factor.
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Definition Definition Estimate of an organization's cash flow for a future period. A cash budget forecasts future cash receipts and payments from various sources for a fiscal year. A cash budget can be created once a month or once a week to determine the organization's cash position and ensure its performance in relation to the budget. It aids in determining whether the company has enough cash and cash equivalents to meet its operational needs in the future.

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