Part B: Report to Baby Factory

Explain to John what the Projected Cash Flow Statement and Income Statement reveal about
the business. Offer any advice you see as relevant
The cash position of the firm has been improved as the quarter recently finished has an ending balance
of $ 6000 while the projected cash flow shows a balance of $ 49100 which is way more then the quarter
passed. Most of the cash inflow is from the operating activities which totals to $ 87100. There is a long-
term asset to be bought on cash. Owner has also projected to invest $ 30000 to but he then withdraws
an amount of $ 24000 also which decreases the balance to $ 6000. The cash position can further be
improved if the receipts are taken on time as the budget shows that whole of the sales are taken in the
month after the sales, the firm can take a percentage of sales at the time of sales thus this would
improve cash inflow. The firm can similarly control cash out flow also by dealing with the suppliers to
take the payments in percentages i.e. some of the percentage in the month of purchases, some of the
percentage in the month after the purchases and some of the percentage two months after the
purchase. This would help the firm increase investment in investing activities which would improve the
profits of the firm.

The projected income statement shows a profit of $ 122300. It also shows that the cost of goods sold
are too high as 75 % of sales is just the cost of goods sold. The fixed cost of the firm is less as it is just
around 4% of the sales which is a little amount. Its beneficial for the firm as if in any season the sales are
low the gross profit would be enough to cover the fixed costs. But the firm’s profits are decreased due
to a high rate of CGS thus the firm must either go for their own production or a deal with another
supplier who would offer the product in a lower cost.

Explain to John the impact on the projected quarterly profit and the closing cash balance of
a) changing the selling price to $260
Other factors kept unchanged if we increase the price per unit to $260 both the projected profit and
the closing cash balance would increase as the revenue would increase but the CGS and the operating
expenses remains unchanged. Similarly, cash inflow would increase but there would be no change in
the cash outflow. The projected profit would increase by $48000 and would reach to $170300. The
closing cash balance would also increase by $33600 and would reach to $82700.

b) moving to more expensive premises costing $5,400 a month in rent.

Other factors kept unchanged if the rent of the building is increased to $5400, both the profit and the
closing cash balance would decrease. As there would be an increase in cash outflow but the cash inflow
would remain the same thus the closing cash balance would decrease. Similarly, there would be an
increase in operating expenses but the revenue would remain the same thus the profits would fall. The
projected closing cash balance would decrease by $6600 and would reach to $42500. Similarly, the
profit would also decrease by $7000 and would reach to $115700.
Changing the selling price to $260, discuss the change and the factors which should be taken
into account before making the change. The factors could include both financial and non-
financial items.
If the firm wants to increase price there are some factors which the firm must take into account. First of
all, if the firm increases the price it is obvious that the sales would decrease, it would either balance the
profit to the previous one or even the profits may be decreased. Thus, first of all the firm should take
this factor into account. Secondly, the firm would have its competitors also, so the firm must go through
the prices of the competitors and set the prices according to the market, as if the prices would be high
the customers would switch to other brands but if the prices are low then the profits would be low.