To trace the performance of XYZ Company on a monthly basis, we need to keep track of net income, receivables, inventory, and cash. The monthly changes in these variables will help us determine the financial health of the company. Assuming that demand increases at the rate of 500 units per month, let's analyze the performance of XYZ Company from January to June.
1. January:
- Sales: 1,000 units
- Cost of production: $750 (1,000 units x $0.75)
- Revenue: $1,000 (1,000 units x $1.00)
- Net Income: $250 (Revenue - Cost of production)
- Cash: $1,125 ($875 starting cash + $250 net income)
- Receivables: $1,000 (No change from the previous month)
- Inventory: 1,000 units (Held equal to the previous month's sales)
2. February:
- Sales: 1,500 units
- Cost of production: $1,125 (1,500 units x $0.75)
- Revenue: $1,500 (1,500 units x $1.00)
- Net Income: $375 (Revenue - Cost of production)
- Cash: $1,875 ($1,125 previous month's cash + $375 net income + $375 collected receivables)
- Receivables: $1,500 (Sales made on account during February)
- Inventory: 1,500 units (Equal to the previous month's sales level)
3. March:
- Sales: 2,000 units
- Cost of production: $1,500 (2,000 units x $0.75)
- Revenue: $2,000 (2,000 units x $1.00)
- Net Income: $500 (Revenue - Cost of production)
- Cash: $2,375 ($1,875 previous month's cash + $500 net income)
- Receivables: $2,000 (Sales made on account during March)
- Inventory: 2,000 units (Equal to the previous month's sales level)
4. April:
- Sales: 2,500 units
- Cost of production: $1,875 (2,500 units x $0.75)
- Revenue: $2,500 (2,500 units x $1.00)
- Net Income: $625 (Revenue - Cost of production)
- Cash: $3,000 ($2,375 previous month's cash + $625 net income)
- Receivables: $2,500 (Sales made on account during April)
- Inventory: 2,500 units (Equal to the previous month's sales level)
5. May:
- Sales: 3,000 units
- Cost of production: $2,250 (3,000 units x $0.75)
- Revenue: $3,000 (3,000 units x $1.00)
- Net Income: $750 (Revenue - Cost of production)
- Cash: $3,750 ($3,000 previous month's cash + $750 net income)
- Receivables: $3,000 (Sales made on account during May)
- Inventory: 3,000 units (Equal to the previous month's sales level)
6. June:
- Sales: 3,500 units
- Cost of production: $2,625 (3,500 units x $0.75)
- Revenue: $3,500 (3,500 units x $1.00)
- Net Income: $875 (Revenue - Cost of production)
- Cash: $4,625 ($3,750 previous month's cash + $875 net income)
- Receivables: $3,500 (Sales made on account during June)
- Inventory: 3,500 units (Equal to the previous month's sales level)
Analyzing the financial health of XYZ Company based on this information:
- Net income is increasing each month, which is a positive sign.
- Receivables are also increasing each month, indicating that the company is accumulating a larger amount of unpaid sales.
- Inventory levels are increasing each month, reflecting the company's policy of holding inventory equal to the previous month's sales level.
- Cash position is improving, showing an increase in cash balance over time.
However, the model portrays a potential financial difficulty for XYZ Company. The company's receivables are growing faster than its cash balance. This indicates that the company is not collecting revenues as promptly as it is making sales. If this trend continues, the company might face cash flow challenges in the future. It is crucial for XYZ Company to improve its collection process to ensure a healthy cash flow and maintain financial stability.