Loan Proposal Project - Case Study

Kate Smith and Rob Gordon have been working for a national law firm, but have now decided to go out on their own. They are well respected in the business and legal community; however, they do not have large cash savings to invest in their new firm. Accordingly, they need to borrow money to finance the opening of their practice. Your task is to prepare a loan proposal to be submitted to local banks for financing.

Final loan proposal package should include the following components in the following order:

• A written cover page to accompany your loan proposal to the Bank. In your cover letter, include the maximum amount the firm will need to borrow at any point during the loan period.
• A Projected Income Statement and Balance Sheet prepared in accordance with GAAP for each year. Ignore deferred taxes; however, accrue any federal income taxes payable at the end of each year. Also, footnotes are not required.
• A monthly Cash Flow forecast for the first two years of the firm. The forecast should be prepared using a computer spreadsheet. Supporting detail of Accounts Receivables & Accounts Payable should be included with the forecast.

Assignment Due:

LP#1 = Year 1 of the Cash Flow forecast along with Year 1 Balance Sheet and Income Statement.

LP#2 = Year 1 & 2 of the Cash Flow forecast along Balance Sheet and Income Statement for both years and the cover letter to the bank.

Format of Excel spreadsheet:

Sheet 1 - input field

Sheet 2 - Monthly Cash Flow forecast and Monthly AR & AP subsidiary schedules for Year 1.

Sheet 3 - Monthly Cash Flow forecast and Monthly AR & AP subsidiary schedules for year 2.

Sheet 4 - Balance Sheet and Income Statement for both years

Projected Financial Information:

1. The firm is organized as a corporation on January 1, Year 1.

2. Kate and Rob each contribute $25,000 on January 1, Year 1 to start the new firm in exchange for equal ownership shares in the business.

3. The firm incurs the following monthly expenses:

Insurance                               2,000

Miscellaneous                          1,000

Office supplies                         5,000

Rent                                       10,000

Non owner salaries                   8,000

Owner salaries - Kate               8,000

Owner salaries - Rob                7,000

1. Expenses are paid as follows:

Salaries - 100% in the month incurred.

Other - 25% in the month incurred, and 75% in the following month.

1. Assume the state tax rate is zero and the federal tax rate is 35%. Any Federal tax is due and paid on March 15th of the following year.

2. Ignore Payroll taxes.

3. All operating expenses (except for year-end bonuses) increase 10% at the beginning of year 2.

4. On January 1 of year 1, the firm buys $40,000 worth of computer equipment and $45,000 of office furniture. For financial accounting purposes compute depreciation expense uses a 5/10-year life for the computer and furniture respectively using the straight-line method.

5. Assume the firm may borrow as much money as it needs. Make the following assumptions regarding the loan:

i. The loan is structured as a line of credit, i.e. like a credit card with an unlimited borrowing capacity.

ii. The interest rate is 7 % compounded annually. Hence, no interest is accrued on prior loan draws until the end of the year.

iii. Accrued interest is due and paid on January 5 of the following year.

iv. Any amount needed for a month is borrowed at the beginning of the month.

v. Any excess cash is used to pay down the debt. There is no need to maintain a cash balance and no interest is paid on any cash balances.

6. Revenue for GAAP is recorded when bills are sent to clients. Billings start small and grow as the firm adds clients. Projected billings are:

                               Year 1                    Year 2

January                    5,000                    50,000

February                  5,000                    55,000

March                      25,000                    55,000

April                        30,000                    60,000

May                         35,000                    65,000

June                        40,000                    70,000

July                         45,000                    70,000

August                     50,000                    70,000

September               55,000                    70,000

October                   55,000                    70,000

November                55,000                    70,000

December                50,000                    60,000

                               -------                    -------

                               450,000                  765,000

                               =======             =======

1. The receivable collection cycle is:

Month 1                  10 % (month of billings)

Month 2                  60 %

Month 3                  20 %

Month 4                  8 %

1. A/R in excess of 120 days old should be written-off at the end of the year. The remaining un-collectable amount in A/R should be reserved for in the allowance for doubtful accounts.

It includes an excel workbook consisting of the cash flow statement, income sheet and balance sheet along with a cover letter to ask for a bank loan depending on how much I project from the previously mentioned statements. This is the loan proposal package I need to turn in:

A written cover page to accompany your loan proposal to the Bank. In your cover letter, include the maximum amount the firm will need to borrow at any point during the loan period.

A Projected Income Statement and Balance Sheet prepared in accordance with GAAP for each year. Ignore deferred taxes; however, accrue any federal income taxes payable at the end of each year. Also, footnotes are not required.

A monthly Cash Flow forecast for the first two years of the firm. The forecast should be prepared using a computer spreadsheet. Supporting detail of Accounts Receivables & Accounts Payable should be included with the forecast.