Question a In the excel worksheet Question b The excel worksheet indicates the cash flows from November 2014 to June 2015. It indicates that the business will incur more costs than it would generate profits for most of the months in the half-year period and hence will have a negative cash flow. The worksheet also indicates the total amount to be collected from customers every month from November 2014 to June 2015. The amount collected from customers is based on the business's new credit policy from January to June 2015. Some of the amounts from customers will be collected in the second half of the year starting from June to December 2015.
Based on the new credit policy, the business will collect higher amounts in the month of sale while it will collect the remaining amount in the second and third months. As indicated in the excel worksheet, the business will make a loss for the first four months from January to April. It will then start to make profits from May onwards. One of the major contributing factors of the loss is the high amount of selling and administrative expenses.
The company is incurring $40,000 every month on the same, this amount is quite much. The manager should consider reviewing the selling mechanism as well as cut on the administrative costs so as to reduce the selling and administrative costs. Another way to improve the cash flow position of the company is to collect more money from the customers. Although the new credit policy is better than the previous one, the business is still not collecting ten percent of the sales. These ten percent are bad debts and they are expenses to the company.
The manager should revise the credit policy again so that the business allows bad debts of only three percent (3%). The manager should ensure that the business is able to collect 7% of the current 10% bad debts. This will increase the amount of cash collected from customers and hence improve the cash flow position of the business. It will also reduce the bad debts, this will increase profits as bad debts reduce the amount of profit (bad debts are expenses to the business). Question c Assuming that there was no beginning or ending inventories, the business will make a net loss for the period from January to June.
This is indicated in the excel worksheet. The opening inventories from the previous year play a very important role as they boost the amount collected from customers. As such, the business will rely very much on them in order to maintain positive cash flow. Question d There are various steps that the store manager can take to ensure that the cash balance of the store remains positive.
One of the steps is to improve the credit policy of the business. The manager should ensure that the business does not sell all its supplies on credit. The store should sell the supplies half on cash and half on credit. This will improve the cash collections from customers. This will also reduce the bad debts to a great extent and hence the company will not incur bad debt expenses. Another way to improve the cash balance is to reduce the running expenses. Currently, the business expenses are very high.
The salaries are not proportional to the number of sales made by the business. In addition, the selling and administrative costs are too high considering that the business is not making high many sales. As such, it is very important for the store manager to ensure that the running expenses are proportional to the number of sales made by the business. Budgeting can assist the company in various ways. Budgeting will give the manager control of cash on the business. The manager will be intentional about the way he will send as well as save money in the business.
It will also keep the manager focused on the goals of the business. This is particularly important as it will avoid the manager from unnecessary spending on items and services that do not contribute to improving the financial stability of the business. The business is undergoing cash flow problems because the manager has lost control of the business finances, the manager is not aware of what is going on with the business money. With budgeting, it will be clear on what money is coming from, how it is used as well as how to improve the business cash collections without necessarily going for bank loan or overdraft.
Budgeting will help the manager to save for the expected costs and the unexpected costs. Essentially, it will help the store manager to plan and set aside money for an emergency as well as boosting the business when sales are low.