Real-Life Math
You're an accountant working for a company that produces gold.
As the treasury accountant, your job is cash forecasting. That means you have
to predict what money you'll receive (revenue) and what money you will
have to pay out (expense).
Within the next month, your company plans
to buy a new mine. That means that you have to do some cash forecasting to
ensure that more money is coming in than going out. In other words, it is
your job to make sure that they'll have enough money in the bank to buy
this new mine. If they don't, you have to figure out how much they have
to borrow from the bank.
You figure the company has to come up with
at least $3 million to have enough to pay for the mine. These are the factors
that you have to consider when you are cash forecasting:
Revenue
You
have to predict how much gold you can sell from your other mines to find out
how much you will have in the bank. Say that your miners have extracted 5,000
ounces of gold in the last month. That gold now has to be processed. The problem
is that on average, the gold millers lose about 10 percent of the gold in
the refining process.
You also have to consider that another 10 percent
of the gold will be in inventory. You also know that not all of your gold
is necessarily sold in one month -- you'll only sell 94 percent of your
gold within the next month.
Looking at the current market value of
gold, you estimate that you will be able to sell the gold for $400 an ounce.
How much revenue do you plan to receive in the next month?
Expenses
You
have to calculate the estimated cost of production. You know that on average,
it costs you $350 to produce one ounce of gold after the refining process.
How much do you estimate your expenses will be for the month?
Taking
into account your predictions about the revenues and expenses for the next
month, would you have enough to buy the mine if your company had another million
already saved in the bank? If not, how much would you have to
borrow from the bank to buy the mine?