Question:

The Genesis Energy operations management team is now preparing to implement the operating expansion plan. Previously, the firm’s cash position did not pose a challenge. However, the planned foreign expansion requires Genesis Energy to have a reliable source of funds for both short-term and long-term needs.

One of Genesis Energy’s potential lenders tells the team that in order to be considered as a viable customer, Genesis Energy must prepare and submit a monthly cash budget for the current year and a quarterly budget for the subsequent year. The lender will review the cash budget and determine whether or not Genesis Energy can meet the loan repayment terms. Genesis Energy’s ability to repay the loan depends not only on sales and expenses but also on how quickly the company can collect payment from customers and how well it manages its supplier terms and other operating expenses. The Genesis Energy team members agreed that being fully prepared with factual data would allow them to maximize their position as well as negotiate favorable financing terms.

The Genesis Energy management team held a brainstorming session to chart a plan of action, which is detailed here.

• Evaluate historical data and prepare assumptions that will drive the planning process.
• Produce a detailed cash budget that summarizes cash inflow, outflow, and financing needs.
• Identify and compare interest rates, both short-term and long-term, using debt and equity.
• Analyze the financing mix (short/long) and the cost associated with the recommendation.

Since this expansion is critical to Genesis Energy expanding into new overseas markets, the operations management team has been asked to prepare an executive summary with supporting details for Genesis Energy’s senior executives.

Working over a weekend, the management team developed realistic assumptions to construct a working capital budget.

1. Sales: The marketing expert and the newly created customer service personnel developed sales projections based on historical data and forecast research
2. Other cash receipt: Rental income $15,000 per month
3. Production material: The production manager forecasted material cost based on cost quotes from reliable vendors, the average of which is 50 percent of sales
4. Other production cost: Based on historical cost data, this cost on an average is 30 percent of the material cost and occurs in the month after material purchase
5. Selling and marketing expense: Five percent of sales
6. General and administrative expense: Twenty percent of sales
7. Interest payments: $75,000—Payable in December
8. Tax payments: $15,000—Quarterly due on 15th of April, July, October, and January
9. Minimum cash balance desired: $25,000 per month
10. Cash balance start of month (December): $15,000
11. Available short-term annual interest rate is 8 percent, long-term debt rate is 9 percent, and long-term equity is 10 percent. All funds would be available the first month when the firm encounters a deficit
12. Dividend payment: None

Based on this information, do the following:

1. Using the Cash Budget spreadsheet, calculate detailed company cash budgets for the forthcoming and subsequent years. Summarize the sources and uses of cash, and identify the external financing needs for both the forthcoming and subsequent years.

   Download this Excel spreadsheet to view the company’s cash budget. You will calculate the company’s monthly cash budget for the forthcoming year and quarterly budget for the subsequent year using this information.

This is the spreadsheet:

Genesis Cash Budget ($000)

Monthly BudgetQuarterly Budget

DecJanFebMarchAprilMayJuneJulyAugSeptOctNovDecMarchJuneSeptDec

Cash Inflow

Sales (Reference only)300,000200,000350,000400,000500,000550,000700,000700,000650,000900,000850,000750,000500,000150,000190,0003,000,0002,400,000

Cash Collections on Sales

  10% in month of sale

  25% in first month after sale

  35% in second month after sale

  30% in third month after sale

Other Cash Receipts

Total Cash Inflow

Cash Outflows

Material Purchases (reference only)

Payment for Material Purchase

  100% in month after purchase

Other Cash Payments

  Other production cost 30%

   of Material cost paid month  

   after Purchase

  Selling and Marketing Expense

  General and Adminstrative expenses

  Interest Payment

  Tax Payment

  Dividend Payment

Total Cash Outlfows

Net Cash Gain/(Loss)

Cash Flow Summary

Cash Balance start of the month

Net Cash Gain/loss

Cash Balance at end of month

Minium cash Balance desired

Surplus cash (deficit)

External Financing Summary

External Financing Balance

  at start of month

New Financing Required

  (negative amount from cash

   suplus (deficit)

External Financing Requirement

External Financing Balance

Please help with the listed calculations.