Determination of cash flows
Based on the given assumptions, the company does not need to borrow any funds to finance its operating expenses. In October and November, the business is expected to make losses of $28,900 and $14,200 respectively. With only a profit of $650 expected in December, the net loss for the three months will be $42,450. Despite this loss, the firm will have adequate cash to finance its operating expenses.
The losses and profit for each of the three months are after deducting depreciation expense. Depreciation expense is a non-cash expense. The company will not pay any money in respect of depreciation. Depreciation is an amount set aside each and every period for replacing a depreciable non-current asset at the end of its useful life (Brigham & Ehrhardt, 2013). It is set aside to reduce the amount of profits available for distribution to the owners of the business. In this case, the company charges a monthly depreciation of $15,000. In order to determine the amount of money available for every month, we add back depreciation to the net profit. It gives a net cash flow of (13,900) for October, $800 for November and $15,650 for December. The total net cash flow for the three months is $2,550. Since this value is positive, there is no need for this company to borrow money to finance its operations.
In addition, cash payment to the owner is not part of the operating expenses of the business. Instead of borrowing from banks and other commercial institutions, the amount disbursed to the owner should be reduced. The owner should only withdraw money from the business after paying all its operating expenses (Baker & Powell, 2009). The amount should be from the profit hence in the months where the business makes a loss; no disbursement should be made to the owner.
References
Baker, H. K., & Powell, G. E. (2009). Understanding financial management: a practical guide. Malden, MA: Blackwell Pub.
Brigham, E. F., & Ehrhardt, M. (2013). Financial management: theory and practice. (14h ed.). New York, N.Y.: South-Western Cengage Learning.
