Question

1. What was the company's net cash flow from investing activities? 5. A new startup company will be producing environmentally friendly diapers and baby products, and you have been named as the chair of its budgeting committee. Thanks to generous investors, and the personal fortune of the company's founder, you have been given $50 million for five years. Using this resource, create a basic budget for the company that shows the operating budget and the financial budget, and also deals with the various costs that a company has to deal with.

that’s all i got, u can give me whatever answer that will match it

Answer 1

I am assuming that the Investors and the founders have provided the $ 50 Million upfront. Hence need to diligently use these funds for the next 5 years

Since we are a startup and nothing has been established, majority of the $ 50 Million funds would go into setting up the plant, machinery and equipment. Assuming 40% of it is used in the 1st year for PPE [Property, plant and Equipment]. Also assuming around $ 7.5 Million for setting up offices, hiring staff, establishing our distribution network, and marketing expenses.

Now to manage the rest of the funding, I would like to keep around $ 2.5 Million in cash as a prudent measure, for any unforeseen situations and keep the rest of our $ 20 Million in liquid investments which would earn interest. That way, I would make sure that none of the cash is just sitting idle. Also would invest part of it in very liquid investments, so that we can get the funds as soon as we need in case we need it.

Now coming to the business P&L, Assume that the company will make a sales revenue of $ 10 Million in the first year, with revenues increasing from year 2-5, due to the economies of scale and better understanding of the market, business and competition. Assuming a 40% cost of goods sold and Selling, general and administrative expenses to be 20% of sales revenue.Depreciation is assumed at 15% of sales revenues. Hence assuming a operating profit margin of 25%. Interest income on the liquid investments of $ 20 Mn could be around 7%. [$ 1.4 Mn]. Tax expense assumed at 30% and hence profit after tax [PAT] margin comes out to be 27.3%. Hence the business would make a profit of $ 2.73 Million in the first year of operations. Hence assuming no dividends, the entire PAT would be retained earnings in our balance sheet

Now coming to the balance sheet, Shareholders equity would be $ 50 Million in the first year of operations. Since we are not borrowing anything in the first year, there will be no other major component on our liabilities section. Coming to assets, our PPE would be $ 20 Million, less accumulated depreciation of $ 1.5 Mn, Office space/Property, prepaid expenses and other assets will be $ 7.5 Million. Cash and Investments will be ($ 2.5 Mn - Cash, $ 20 Mn - Liquid Investments, $ 2.73 Mn of Retained Earnings + Non cash depreciation expense of $ 1.5 Mn] = $ 26.73 Mn.

Basic Balance sheet: [End of 1st Year]

Assets

Net Property, Plant and Equipment: [$ 20 Mn - $ 1.5 Mn] = $ 18.5 Mn
Property, Prepaid Expenses and Other Current Assets = $ 7.5 Mn
Cash and Liquid Investments [$ 2.5 Mn - Cash, $ 20 Mn - Liquid Investments, $ 2.73 Mn of Retained Earnings + Non cash depreciation expense of $ 1.5 Mn] = $ 26.73 Mn

Total Assets = $ 52.73 Mn

Equity and Liabilities

Equity = $ 50 Mn
Retained Earnings = $ 2.73 Mn
Other Liabilities = $ 0 Mn [ for the simplicity of explanation]

Total Equity and Liabilities = $ 52.73 Mn

Basic Profit and Loss Statement for the 1st Year

Sales Revenue = $ 10 Mn
(less) Cost of Goods sold = $ 4 Mn [ Assumption: 40% of sales revenue]
Gross Profit = $ 6 Mn
(less) Selling, General and Administrative Expenses = $ 2 Mn [ Assumption: 20% of sales revenue]
(less) Depreciation = $ 1.5 Mn [ Assumption: 15% of sales revenue]
Operating Profit = $ 2.5 Mn
(add) Interest Income = $ 1.4 Mn [ Interest on Liquid Investments]
Profit before tax = $ 3.9 Mn
(less) Tax expense = $ 1.17 Mn

Profit after Tax = $ 2.73 Mn

Going ahead the company might have to increase its investments in PPE and to expand its network. In that case the company would need to borrow money at least in the 4th or 5th year, to increase this investment. Hence in that case the financing budget would need to look for the least costlier money that the company would get

Also in terms of costs, the major costs would be the goods for preparing diapers. We have assumed it to be 40% of our revenues. And major cost would be rent, salaries, cash credits and so on, which would be roughly around 20% of our revenues. Inventory costs are generally assumed in the COGS itself. Going forward the company might want to increase its revenues at least by 10% year on year and hence the company needs to invest the same in the PPE and other costs