FIN 375 Week 2 Budgets and a Cash Flow Forecast Example

From Sales Forecast to Cash in the Bank: An Operating Budget and a Twelve-Month Cash Flow Forecast That Finds the Bike Shop's February Squeeze Before It Happens

[Student Name]

University of Phoenix

FIN/375: Financial Management in the Small Business

Week 2 Assignment

[Instructor Name]

[Date]

The bicycle shop and all figures are composites written for a model paper; methods and research findings come from the sources listed.

The bike shop's owner now has a monthly sales forecast of about $2.68 million for the year, with a sharp spring peak. The next step is to see what that forecast means for profit and, more urgently, for cash. Last spring the shop ran short of money in March while its stockroom was full of bikes that would not sell until April. The operating budget answers whether the year will be profitable; the cash forecast answers whether the business can get through February. This paper builds both.

The Operating Budget

Cost of goods sold follows the product mix: about 62% of sales for conventional bikes, 70% for e-bikes, 52% for parts and accessories and 30% for repairs, where most of the cost is mechanics' time, budgeted separately. Blended cost of goods for merchandise is about $1.44 million, leaving gross profit on merchandise and repair parts of about $1.24 million.

Operating expenses include payroll of about $620,000, with seasonal staff added from March through August; rent for the two locations of $132,000; utilities, insurance, software and card processing fees of about $150,000; and marketing of $40,000. Operating income is about $300,000 before the owner's salary, which is paid as a draw because the shop is an S corporation owned by one person, and before interest and taxes.

Timing Assumptions for Cash

Cash timing differs from the budget. About 97% of sales are by card, which settle in two days, so receipts arrive almost when sales occur. Inventory is the key difference: the shop orders most of its spring bikes in October and November for delivery in January through March, and its main suppliers offer terms of net 60 to net 90 on preseason orders, so payments fall due from March through May. E-bike suppliers require payment within 30 days of delivery. Parts are bought weekly on net 30 terms.

Payroll is paid biweekly. Rent is paid on the first of each month. The owner draws $8,000 a month plus a year-end distribution. Quarterly estimated taxes on the owner's share of profit are about $18,000 each. The shop repays $2,100 a month on an equipment loan.

The Monthly Forecast

The shop begins the year with $140,000 of cash, more than last year because the owner held back part of the year-end distribution. January and February bring low sales, about $95,000 and $110,000, while preseason e-bike deliveries require payment within 30 days and seasonal hiring begins. Cash falls to about $48,000 by the end of February. In March, payments for the first preseason bike orders fall due while sales are still ramping, and the forecast shows cash falling to minus $62,000 in mid-March, the lowest point. April and May sales of about $330,000 and $390,000 restore cash, and by June the shop has about $180,000. Cash builds through summer and dips again modestly in the fall when holiday orders are placed.

Sizing the Credit Line

The deepest forecast shortfall is about $62,000 below zero in mid-March. The owner wants to keep at least $30,000 in the bank at all times for payroll and unexpected repairs, so the need is about $92,000. A 20% cushion for a slower spring brings it to about $110,000. The owner will ask the bank for a $125,000 revolving line of credit, drawn in February and March and repaid by June, secured by inventory.

A Delayed Spring

A cold, wet April could delay sales by several weeks. In that case, April sales fall to about $250,000 and the forecast low deepens to about minus $105,000 in early April, just within the proposed line with the cushion. The owner can also negotiate to delay some bike payments or reduce the second preseason order if early indicators are weak.

Ways to Shrink the Need

Borrowing is not the only answer. The owner can ask the largest bike supplier to split the preseason order into two deliveries, one in February and one in April, which would move about $140,000 of payments later. The shop can also run a winter service promotion, such as discounted tune-ups in January and February, to bring cash in during the slowest months, and it can hold its year-end distribution until June. Together these steps would cut the forecast shortfall by about half, reducing interest costs and the risk of relying on the bank.

Taxes and the Owner's Draw

Because the shop is an S corporation, its profit passes through to the owner's personal return. The forecast therefore includes the owner's estimated tax payments as a cash outflow, even though they are not a business expense. Missing them would understate the cash the shop really needs, a common error in small business forecasts.

Profit Versus Cash

The year is profitable, yet the shop cannot pay its bills in March without borrowing. The reason is timing: $500,000 of bikes are paid for before they sell. Churchill and Mullins (2001) argued that growing companies must measure how fast they can grow using their own cash, since growth ties up money in inventory and receivables before it produces cash; the bike shop's seasonality creates the same pressure each year even without growth.

Using the Forecast

The owner will update the forecast monthly with actual sales and cash, compare them, and extend the forecast twelve months ahead each time, the rolling approach that entrepreneurship texts recommend for businesses with volatile cash needs (Timmons & Spinelli, 2009). Scarborough and Cornwall (2019) describe the cash budget as a small business owner's most important planning tool, and the owner will review it every Monday with the bookkeeper during the spring.

Conclusion

The operating budget shows a profitable year, but the cash forecast shows a shortfall of about $62,000 in mid-March, driven by paying for spring inventory before it sells. A $125,000 credit line, drawn in late winter and repaid by early summer, covers the shortfall with a cushion for a delayed spring.

References

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

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

Timmons, J. A., & Spinelli, S. (2009). New venture creation: Entrepreneurship for the 21st century (8th ed.). McGraw-Hill.