Most new
business owners think that increasing sales is the solution to generating cash.
What they fail to realize is that they require cash to generate additional
sales. It is important to remember that time is required to generate new sales.
There may also be a collection period, and there are overhead costs to consider
as well.
Consider
an example. D3 Team Travel has been in business for a year. It generated
$365,000 in sales during that first year. From month-to-month, it has been able
to maintain $1,500–$2,200 in cash-in-hand. Its goal is to increase sales by $50,000
during the second year of operation. The company's gross profit (GP) margin is
25 percent of sales. The average collection period (ACP) is 45 days. The vice
president (VP) of sales estimates the extra overhead (EO) to generate the extra
sales (travel expenses, advertising, and promotion) will be $8,500.
Use the
following formula to determine the extra cash required (ECR) to generate this
$50,000 sales increase:
ECR =
((ISG – GP + EO) x ACP)/365
Where,
ISG = Increase in sales goal
GP = Gross profit in dollars on the sales increase goal
EO = Extra overhead costs to meet sales increase goal
ACP = Average collection period in days
Determine
the ECR to support D3 Team Travel's goal to generate an additional $50,000 in
sales over the next year. Considering its average monthly cash-in-hand, would
you recommend that it fund the $50,000 ISG? If so, justify your answer with
hard figures. If not, determine an ISG that you would support, if any, and
justify your answer.
Submit
your answers in a 1- to 2-page Microsoft Word document.
Cite any
sources using the APA format on a separate page.