Budgets and pro forma statements were utilized to predict how much cash on hand would be available for capital improvements and production capacity increases by estimating future sales and expenses to estimate the amount of revenue the company would take in in each quarter, the expenses incurred each quarter and the amount of cash left over for use by the company. Estimating cash on hand at the end of each quarter allowed for the decision of increase of production capacity each quarter of the simulation results.
Pro Forma statements were utilized to ensure cash on hand was enough to cover future sales office openings and production increases, as well as allow the company to weather unforeseen economic events. Using a conservative approach to predicting sales and revenues allowed the company to accomplish this goal. However, the economic conditions of the simulation did not warrant this conservative approach and a much more aggressive cash management strategy could have been utilized to increase return on investment that was lost due to the amount of cash on hand sitting idle at the end of each quarter.
For the first quarter, the pro forma statements showed excess of cash on hand, so the decision was made to deposit a portion of excess cash to be put into a certificate of deposit so it would be generating interest income instead of sitting idle, since the projected revenue from sales and increased costs from marketing would leave ample cash flow for the increase in production capacity planned for the third quarter, even after the opening of the New York and Tokyo sales offices planned for the second quarter. $400,000 was placed in the certificate of deposit for an estimated interest income of $6,000. The initial production capacity investment in this quarter was kept to a minimum at $600,000 due the product cycle being in the research and development phase