The company, CBM, is experiencing a significant lack of funds from April to September, as indicated in the monthly cash budget report. Consequently, it will require external funding to partially cover its monthly cash requirements.
The company faced a severe shortage of cash in June due to plant investment. Short term borrowing will be used to finance the investment. Only in November was the minimum cash balance requirement met, which was achieved through the collection of September sales.
Furthermore, the firm has experienced a decrease in sales over the past two months which suggests that it may not be able to meet its cash requirements independently. As a result, borrowing may be necessary.
The minimum amount of credit required by CBM is $214,000, with this sum needed in June to finance a plant investment. This has been determined
...as the minimum borrowing requirement as it represents the firm's highest cash need.
During all months except June, CBM's financing needs do not exceed $214,000. This will enable the company to invest in plant and assets and smoothly operate daily activities without experiencing cash shortages. However, in June, the firm's financing needs are as follows: Cash Position at the end of May = -164,000; Minimum Cash Balance = 50,000; Financing Needed = $ 214,000. In terms of CBM's cash position during the budget period, it appears to be weak as the cash balance remains negative in all months except one. This highlights the urgent need for external financing to meet the minimum cash balance requirements and prevent cash shortages.
The company must be cautious of several possible concerns. Initially, sales have decreased in the last two months of th
budget period. If this pattern persists, financing the cash requirements that may remain stable or even rise could become a challenge for the company. Additionally, unless CBM can acquire short-term financing with the lowest interest rate, increasing labor and material expenses might result in financial losses. Lastly, as a bank manager, I might hesitate to extend credit to CBM because of their recent business decline in October and November which involved reduced sales, higher labor and material costs along with overall shrinking operations.
It has been indicated that the company is either shutting down units or dismissing employees in order to prevent incurring losses. The company must provide justification for these actions to its creditors. In addition, it must demonstrate its capacity to pay interest on its debts, as failure to do so may result in the creditors taking control of the company and halting its operations.
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