MT209 Unit 5 Cash Flow Projection Example

Profitable on Paper, Short in September: A Unit 5 Cash Flow Projection for a Screen Printing Shop

[Student Name]

Purdue University Global

MT209: Small Business Management

Unit 5 Cash Flow Projection

[Instructor Name]

[Date]

Northfork Print and Stitch and every figure are composite and illustrative; bracketed figures stand where the shop's books would supply the numbers; the sources cited are real.

Assumptions

Sales are projected at the same total as last year, about [$640,000], with the same monthly pattern: [$38,000] in January, falling to [$30,000] in February, rising through spring, then [$96,000] in August, [$104,000] in September and [$70,000] in October, before easing to [$42,000] in November and [$46,000] in December.

Receipts depend on who buys, because each customer group pays on its own schedule. Counter and event sales are paid the same day. Business accounts pay about thirty days after invoice. School purchase orders pay about fifty-two days after delivery, so most of an August shipment turns into cash in October, and a fifth of it arrives a month later still. Schools make up about a quarter of sales in most months but about 60 percent in August and September.

Payments follow their own timing. Blank garments, about 23 percent of sales, are paid thirty days after delivery. Ink, thread, screens, freight and outsourced work, about 18 percent of sales, are paid in the month used. Payroll runs about [$10,000] a month in winter, [$11,500] in spring and summer, and [$15,500] in August through October with overtime and a seasonal helper. Rent is [$4,200], the press loan [$560], other overhead about [$6,000] and the owner's draw [$5,000] each month.

The opening balance on January 1 is [$22,000]. A negative balance means a draw on the [$50,000] line of credit.

The Monthly Projection

January brings in about [$41,700] and pays out [$43,500], ending at [$20,200]. February ends at [$15,500] and March at [$9,500], as slow winter sales fail to cover fixed costs. April's spring orders bring receipts up, but April ends at only [$1,900] because payments for blanks and payroll rise first.

May and June dip slightly below zero, at [$3,500] and [$2,500] drawn on the line, as track and graduation orders are paid for before schools pay. July recovers to a small positive balance of [$300].

August is where the squeeze begins. Receipts are about [$43,100], mostly from July and spring orders, while payments jump to [$58,700] for blanks, overtime and supplies. The month ends with [$15,200] drawn on the line.

September is the low point. Receipts are about [$47,800], since August's school orders have not yet been paid, while payments reach [$72,800], including August's blank garment bill. The month ends with about [$40,200] drawn, and the balance is slightly lower in the last week before the first school checks arrive. That leaves less than [$10,000] of the line available.

October turns the corner. School payments for August arrive and receipts reach [$85,900], against payments of [$68,400], so the draw falls to [$22,800]. November brings in [$95,000] as September's school orders pay, ending with a positive balance of [$22,400]. December ends at [$55,800].

The shop earns most of its profit in the fall and borrows most of its cash in the same months.

What the Projection Shows

The shop is profitable for the year: receipts exceed payments by about [$33,800]. But profit and cash arrive at different times. The busy season requires the shop to buy blanks and pay overtime weeks before schools pay for the finished shirts. Churchill and Mullins (2001) described this as the self-financeable growth problem: a company whose cash cycle is long must finance its own sales growth, and fast-growing firms can run out of cash while selling more.

The shop's real exposure is the fifty-two-day school payment cycle. Petersen and Rajan (1997) showed that sellers often act as lenders to their buyers through payment terms, and that carrying those receivables weighs most on sellers whose own borrowing is tight. For Northfork, every school purchase order is an interest-free loan to the school, paid for with the shop's credit line.

Sensitivity

Two changes would push the shop past its line. If school payments slipped by two weeks, about [$12,000] of October receipts would move into November, and the September draw would stay near its peak into mid-October. If fall sales came in 10 percent higher than projected, the extra blanks and overtime would add about [$9,000] to the September draw, nearly exhausting the line. Growth, in other words, makes the cash problem worse.

Options

Three changes would ease the trough. Requiring a 50 percent deposit on booster club orders, which are paid by check and often late, would bring about [$8,000] of fall cash forward. Accepting card payment for school orders under [$1,500], at a fee of about 3 percent, would turn some fifty-two-day receipts into two-day receipts. And moving the shop's own blank garment terms from thirty to forty-five days, if the distributor agrees in exchange for consolidated fall orders, would push August's bill past the September low point. Scarborough and Cornwall (2019) recommend that small firms manage receivables and payables actively rather than relying on credit lines to absorb timing gaps, and these three changes do that.

References

Churchill, N. C., & Mullins, J. W. (2001). How fast can your company afford to grow? Harvard Business Review, 79(5), 135-143.

Petersen, M. A., & Rajan, R. G. (1997). Trade credit: Theories and evidence. Review of Financial Studies, 10(3), 661-691. https://doi.org/10.1093/rfs/10.3.661

Scarborough, N. M., & Cornwall, J. R. (2019). Essentials of entrepreneurship and small business management (9th ed.). Pearson.