Answer & Explanation:
The cash budget summary for Modern Elite Manufacturing Co shows negative cash balances in Quarters 1, 3 and 4, which indicates that the company may have cash flow problems. The negative cash balances are a result of the company's high disbursements, which outweigh their receipts. Rapidly growing companies with significant inventory requirements will encounter tight cash flow situations when they are expanding operations. Because Modern Elite is expanding its operations, it is undergoing such a scenario.
To address the cash flow problems, there are several actions that the company can take. Firstly, the company could consider delaying payments of accounts payable, negotiating a longer delay with a creditor or various creditors. Additionally, the manufacturing team could optimize its production and inventory systems to reduce cost through standardization of materials, enhanced inventory turns in the manufacturing process, streamlined production, and better sales forecasting. The company could also implement effective cost cutting measures to curb expenses, such as limiting overtime pay, downsizing the workforce if possible, and reducing other operating expenses.
To demonstrate the effects of these actions, we can prepare a new set of cash budget, income statement, and balance sheet that would show the optimism of improvements in cash flows. The new cash budget after cost-cutting measures, production and inventory optimization and supplier negotiations may be:
Modern Elite Manufacturing Co for Budget Year 2024: Cash Budget
Quarter 1 2 3 4
Cash Balance Beginning 32,500 -38,000 32,000 -18,000 ADD: Receipts 450,000 500,000 500,000 500,000 Total Cash Available 482,500 462,000 532,000 482,000 LESS: Disbursements 440,500 390,000 460,000 390,000 Excess (Deficits