Assignment Overview
You are required to complete a comprehensive working capital case study for ABC Company—a start-up specializing in neurological testing devices—using the financial and operational information provided.
Task Summary
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Objective:
Ensure ABC Company maintains a positive cash flow and ending cash balances in both Year 2 and Year 3. -
How:
You must determine (and adjust, as needed) the following variables for Years 2 and 3:-
Sales increase (Volume)
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Days in accounts receivable
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Days in inventory
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Days in accounts payable
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Use the margin information and operating expense percentages specified in the case.
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Complete the provided balance sheets, income statements, and schedules of cash flows for Years 2 and 3, based on your selected inputs and calculations.
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Step-by-Step Instructions
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Review ABC’s Starting Position:
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Year 1 sales: $3,000,000
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Gross margin: 41%
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Operating expenses: 30% of sales
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Cash at year-end: $3,525
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Initial financing: $369,074 equity + $4,500,000 loan
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Cash conversion cycle: 41 days (A/R: 37 days, Inventory: 49 days, A/P: 45 days)
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Review Constraints:
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No more cash investments or new loans/equity.
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Debt principal and interest must be paid in Years 2 and 3.
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Capital expenditures required: $75,000 (Year 2), $950,000 (Year 3).
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Key Changes for Years 2 and 3:
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Gross margin target: 42%
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Operating expenses: 19% (Year 2), 14% (Year 3)
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Determine Inputs and Calculate:
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Increase in sales (target annual growth) for Years 2 and 3
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Optimal days in accounts receivable, inventory, and accounts payable for positive cash flow
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Calculate resulting:
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Accounts receivable
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Inventory
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Accounts payable
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Use provided Excel templates (recommended) for automation.
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Complete and Submit:
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Balance sheets for Years 2 and 3
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Income statements for Years 2 and 3
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Schedule of cash flows for Years 2 and 3
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Additional (input) sheet used for variable changes and assumptions
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Critical Requirements:
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Ending cash balance on the schedule of cash flows must agree with the cash line on the balance sheet for each year.
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No handwritten answers—submissions must be typed.
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Do NOT submit a statement of cash flows (though using one for your calculations is recommended to avoid errors).
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What to Submit
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Typed Excel files containing:
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Balance sheets (Years 2 and 3)
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Income statements (Years 2 and 3)
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Schedule of cash flows (Years 2 and 3)
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Additional input sheet (variables and assumptions)
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Ensure all numbers and formulas are correct and cash balances reconcile.
Brief Description:
This assignment challenges you to use real financial management techniques to keep a startup company cash-flow positive while adjusting sales growth and working capital management levers. You must calculate, test, and document the inputs and outputs for two future years based on both operational goals and financial constraints.
The answer
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