Outside Financing and Cash Position Analysis

The assignment content discusses the cash budget of Company B (CBM), which requires outside financing from April to July. The minimum line of credit needed is $248,000 in July. The company experiences cash shortages in March, April, and June, but expects to have excess cash in all other months. CBM's cash situation improves after June, allowing it to start repaying borrowed amounts by the end of July. Based on this information, a bank manager might consider having CBM as a client.

1. Will the company need any outside financing?
Answer. Yes, in the months of April, May, June and July, the company will need differing amounts of
outside financing.
2. What is the minimum line of credit that CBM will need?
The company will need to borrow $120,000 in April, $114,500 in May, $17,250 in June, and $248,000
in July. The minimum credit line to be arranged must be such as to satisfy CBM’s highest borrowing
needs. Thus, at a minimum the line of credit that CBM will surely need is $248,000.
3. What do you think of CBM's cash position during the budget period? Do you see any concerns for
the company in this regard?
During the budget period, the months of March, April and June are expected to end with cash
shortages. Of these months, June is expected to end up with the worst cash shortage but it must be
noted that this cash shortage would have been reduced if tax payments and investment in plant
were not to occur. In all other months, CBM is expected to end with cash excess.
4. If you were a bank manager, would you want CBM as your client? Why or why not?
Not considering the cash outflows attributable to repayments of borrowed amounts, the cash
budget indicates CBM’s cash situation to get better after June. With better cash flows from July, CBM
would be in a position to start repaying. The accumulated total borrowings of the four months would
get repaid within two months starting from July. This response, however, is based on the assumption
that the bank can wait for at least 6 months (which is a short term) before it can expect to get
repaid. In this situation, I would contemplate having CBM as my client.