Optimal Cash Investment for Firm Value

This assignment focuses on finding the optimal levels of operating cash investments for a firm to maximize its value. It involves analyzing and optimizing a supplier payment schedule, considering factors like produce and drinks purchases, monthly payments, and percentages due at different intervals. The goal is to determine the most effective cash flow management strategy that contributes to overall profitability.

Running head: BUDGET ANALYSIS
Budget Analysis
Student’s Name:
University Name:
Author Note

1BUDGET ANALYSIS
Executive Summary
In this study the different types of budgets are discussed with the help of case studies.
The government of Australia sets out the budget in order to cut out and shape the economic
outlook of Australia and tries to figure out the expected revenue or loss that might be earned
on a respective financial year.
The specific budgets that are discussed in this study are sales budget, labor budget and
cash budget.
This project specifically deals with the preparation of budgets and the various issues
that are faced while preparing the same. The problems or issues that generally individuals
come across while investing in their business proposals, are also discussed. The net present
value, the accounting rate of return and the payback period is also shown in this study for
better understanding of the concepts.

2BUDGET ANALYSIS
Table of Contents
Investment One Requirements...................................................................................................3
Answer to Part (a)..................................................................................................................3
Answer to Part (b)..................................................................................................................3
Answer to Part (c)..................................................................................................................5
Answer to Part (d)..................................................................................................................6
Investment Two..........................................................................................................................7
Answer to Part (a)..................................................................................................................7
Answer to Part (b)..................................................................................................................8
References..................................................................................................................................9

3BUDGET ANALYSIS
Investment One Requirements
Answer to Part (a)
The nature and scope of investments related to Mark and Paul can be assessed but
before that the term investment should be understood properly. The word investment as per
the accounting terms refers to purchasing of a financial product or investing the resources in a
financial product with the expectation of returns in the future in the form of profit. In simpler
terms investment is used as a tool for making more money. In order to improve the skills of
mangers in relation to decision making the management of investment with the help of
newest theories on portfolio management and capital market functioning is done (Marglin,
2014).
Mark and Paul have a wide scope of investment. The objective of analyzing the nature
and scope of investment refers to understanding of the rules and regulations related to the
different investment decisions and also identifying the domain in which the investment falls.
In the case of Mark and Paul they can opt for an investment decision only after critically
assessing the situation starting from the collection of initial funds till the expected returns
from the venture. The various rules of investment decision making will help Mark and Paul to
standardize the entire setting up process of the restaurant. The primary point that should be
kept in mind is that the returns from the restaurant business should be predicted according to
the present conditions and this should be ensured at any cost. Mark and Paul, being the
investors must keep a vigilant eye for factors like the performance of the collection in
comparison to the benchmark set. The various components that should be kept in mind in
determining the health of the different investments are expense ratio, style, sector weighting
and various other factors. The goal of the investment should always be given priority
including the returns from that particular investment (Melo, Graham and Brage-Ardao 2013).
Answer to Part (b)
Sales Budget:
Particulars June July August September TOTAL
Sales Volume of Meal (in units) 18000 22000 40000

4BUDGET ANALYSIS
Average Sale Price per meal $45 $45 $45 $45 $45
Revenue from Meal Sales $0 $0 $810,000 $990,000 $1,800,000
Sales Volume of Drinks (in units) 0 0 54000 66000 120000
Average Sale Price per drinks $6 $6 $6 $6 $6
Revenue from Drinks Sales $0 $0 $324,000 $396,000 720000
Projected Sales Revenue $0 $0 $1,134,000 $1,386,000 $2,520,000
Cash Budget:
Particulars June July August September TOTAL
Cash flow from Operating
Activities:
Receipt from Sales Revenue $0 $0 $1,134,000 $1,386,000 $2,520,000
Payment to Supplier ($2,000) ($51,000) ($60,000) ($113,000)
Staff Wages Paid $0 $0 ($9,936) ($9,936) ($19,872)
Monthly Overhead Costs ($5,000) ($5,000) ($5,000) ($5,000) ($20,000)
Net Cash Flow from Operating
Activities ($5,000) ($7,000) $1,068,064 $1,311,064 $2,367,128
Cash flow from Investing
Activities:
Purchase of Machinery ($110,000) ($110,000)
Purchase of Furniture ($30,000) ($30,000)
Purchase of Vehicle ($43,000) ($43,000)
Purchase of Utensils ($18,000) ($18,000)
Net Cash Flow from Investing
Activities ($201,000) $0 $0 $0 ($201,000)
Cash flow from Financing
Activities:
Investment by owners $281,000 $281,000
Owner's Drawings ($10,000) ($10,000) ($10,000) ($10,000) ($40,000)
Net Cash Flow from Financing
Activities $271,000
($10,000
) ($10,000) ($10,000) $241,000
Net Increase/(Decrease) in cash
balance $65,000
($17,000
) $1,058,064 $1,301,064 $2,407,128
Add: Opening Cash Balance $0 $65,000 $48,000 $1,106,064 $0

5BUDGET ANALYSIS
Closing Cash Balance $65,000 $48,000 $1,106,064 $2,407,128 $2,407,128
Labour Budget:
Particulars June July August September TOTAL
Nos. of Casual Staff 3 3 3
Nos. of Hours in a day 6 6 12
Nos. of Days in a Week 6 6 6
Weekly Labour Hours 108 108 216
Weeks per month 4 4 4
Total Labour Hours per month 432 432 864
Labour Rate per hour $23 $23 $23
Staff Wages Paid per month $0 $0 $9,936 $9,936 $19,872
Answer to Part (c)
Sales budget is a major part of or chunk of the master budget and it displays the
assumed or real number of units of sales and the price per unit fixed. Sales budget can also
influence the remaining components of the master budget, indirectly or directly. The total
amount of sales estimated with the help of a sales budget is used as a base figure in other
component budgets (Johnston and Marshall 2016).
Labour budget can be used to provide the total direct labour cost and the total count of
labour hours that is required for production. It forms great help to the management for
planning the labour force requirements (DRURY 2013). The Labour budget is generally
prepared after the creation of production budget because the production budget is essential
for supplying the required data for the preparation of the Labour budget. The Labour budget
is made with the primary purpose to facilitate programs of transfer and training of the
personnel department and also to find out the sources of labour needed so that no issue arises
due to non-availability of suitable labour personnel (Hofstede, 2012).
The cash budget provides a measure of the assumed receipts and assumed payments
of cash during the stipulated period of the budge. In simpler terms, each and every factor that
results in a change in the payments and receipts of cash is considered while the cash budget is
prepared (Carraher and Van Auken, 2013). The cash budget prepares a provision for a
minimum amount of cash balance for all times. Generally while preparing a cash budget the

6BUDGET ANALYSIS
balance most probably will be equal to the operating expenses for a month added with certain
other provisions. The chief accountant generally prepares this budget so that the management
of the organization gets proper information and takes proper decisions (Michalski, 2013).
In case of Mark and Paul, it can be observed in the sales budget that the total revenue
from meal sales is $1800000 and the revenue from drinks sales is $720000. The revenue
earned is pretty high and this will help Mark and Paul to plan further investments that may
result in more profit in turn. The sales budget also helps in revealing the seasonal fluctuations
in the trend of sales. Here in this sales budget though, the figures seem fine and there is no
major concern about the business until now.
The labour budget prepared presents the information that the staff wages paid per
month is $19872 in total. As there is no mention of overtime in the question so no insight can
be provided regarding this. Overall, the staff wages paid per month seems legitimate and fair.
The cash budget prepared in case of Mark and Paul shows the closing cash balance of
the months of June, July, August and September the respective amounts of $65000, $48000,
$1106064 and $2407128. It is very clear from the amounts that the cash balance once dipped
in the month of July but then it regained its increasing trend and the cash balance for the
month of September as recorded is highest. Excluding the month of July which suffered a
loss the business of Mark and Paul, as can be observed is prospering normally.
Answer to Part (d)
The issues that Mark and Paul should consider while making their decision to invest
in the restaurant is that the collection of enough funds in the form of the establishment cost,
the identification of the project and its evaluation so as to ensure the viability of the project
and its prospectus. Other practical issues that might be faced by Mark and Paul are regarding
the location of the restaurant. The location of the restaurant should be such that it can be
accessible by the people staying in the main part of the city as well as outskirts of the city.
The food sold in the restaurant is also an important issue that needs to be given due
importance. The food should be in accordance to the tastes and preferences of the local
community and also the quality of the food should be at par with the set standards. Last but
not the least the terms and condition of partnership shared between Mark and Paul should be
clear and concise and agreed upon by both the partners.

7BUDGET ANALYSIS
Investment Two
Answer to Part (a)
Period
Particulars 0 1 2 3 4
Initial Investment ($390,000)
Net Cash Inflow $100,000 $230,000 $190,000 $140,000
Net Annual Cash Flows ($390,000) $100,000 $230,000 $190,000 $140,000
Cumulative Cash Flow ($390,000) ($290,000) ($60,000) $130,000 $270,000
Payback Period 3.32
Discount Rate 12% 12% 12% 12% 12%
Discounted Cash Flow -$390,000 $89,286 $183,355 $135,238 $88,973
Net Present Value $106,851
Average Annual Cash Inflow $165,000
Accounting Rate of Return 42.31%
As it can be observed in the above table the payback period refers to the number of
years within which the original cost of investment can be recovered while the net cash flow is
zero (Bierman and Smidt, 2012). The payback period here is 3.32 years which is not too long
and further indicates that the business has a bright future (Larson and Gray 2013).
The net present value is $106851. A net present value that is positive, that is, a
positive amount indicates that the net income induced by a project is more than the
anticipated costs. In general, an investment with a positive Net Present Value will most
probably be a profitable venture and the investment project with a negative Net Present Value
will imply a net loss (Schutt et al., 2012).
The accounting rate of return as calculated is 42.31%. This indicates that the returns
from the capital investment, made by Mark and Paul are both profitable and positive (Magni
and Peasnell 2012). Though the accounting rate of return does not consider the time value of
money, the venture will accrue enough revenue as the rate is quite high (Li 2015).

8BUDGET ANALYSIS
Answer to Part (b)
No, the two investments cannot be compared because in case of investment one the
cash, sales and labour budget has been discussed and in case of investment two the
accounting rate of return, the payback period and the net present value has been discussed.
Thus discussion of the totally different aspect of both the investments, make them
incomparable in nature.

9BUDGET ANALYSIS
References
Bierman Jr, H. and Smidt, S., 2012. The capital budgeting decision: economic analysis of
investment projects. Routledge.
Carraher, S. and Van Auken, H., 2013. The use of financial statements for decision making
by small firms. Journal of Small Business & Entrepreneurship, 26(3), pp.323-336.
DRURY, C.M., 2013. Management and cost accounting. Springer.
Hofstede, G.H. ed., 2012. The game of budget control. Routledge.
Johnston, M.W. and Marshall, G.W., 2016. Sales force management: Leadership, innovation,
technology. Routledge.
Larson, E.W. and Gray, C., 2013. Project Management: The Managerial Process with MS
Project. McGraw-Hill.
Li, X., 2015. Accounting conservatism and the cost of capital: An international analysis.
Journal of Business Finance & Accounting, 42(5-6), pp.555-582.
Magni, C.A. and Peasnell, K.V., 2012. Economic profitability and the accounting rate of
return.
Marglin, S.A., 2014. Public Investment Criteria (Routledge Revivals): Benefit-Cost Analysis
for Planned Economic Growth. Routledge.
Melo, P.C., Graham, D.J. and Brage-Ardao, R., 2013. The productivity of transport
infrastructure investment: A meta-analysis of empirical evidence. Regional Science and
Urban Economics, 43(5), pp.695-706.
Michalski, G., 2013. Planning optimal from the firm value creation perspective levels of
operating cash investments. arXiv preprint arXiv:1301.3824.
Schutt, A., Chu, G., Stuckey, P.J. and Wallace, M.G., 2012, May. Maximising the Net
Present Value for Resource-Constrained Project Scheduling. In CPAIOR (pp. 362-378).

10BUDGET ANALYSIS
Appendix
Supplier Payment Schedule:
Particulars June July August September TOTAL
Produce Purchase per week $10,000 $10,000
Weeks per month $4 $4
Produce Purchase per month $40,000 $40,000 $80,000
% of Payment $1 $1
Total Monthly Payment fot
Produce $40,000 $40,000 $80,000
Drinks Purchase per month $20,000 $20,000 $20,000 $60,000
10% Payment on the month of
purchase $2,000 $2,000 $2,000
45% Payment on 60 days after the
Purchase $9,000 $9,000
45% Payment on 90 days after the
Purchase $9,000
Total Monthly Payment for Drinks $0 $2,000 $11,000 $20,000 $33,000
Total Payment to Supplier $0 $2,000 $51,000 $60,000 $113,000