Introduction
This case focuses on the financial needs and the future financial goals of the Smith Family. The family wants to devise a future plan in order to meet the future commitments related to the expenses incurred monthly, the education of the children and all other expenses that would take place. Currently a situation of cash crunch is being faced by the Smith Company. Therefore, Joel and Amber want to now devise a financial plan which is going to increase the savings of the company that would be helpful for the company for the future when both of them would get retired.
Currently, the total family income is about $80000, however, despite that the outflows of the company per month are much higher than the inflows of the company and the Smith Family does not know where all the income goes and this is also because the family has no budget maintained for its expense and there is no specific financial plan held by the family which shows how much savings are being made for the future.
Along with this, the family prepares its tax returns by themselves and they are not sure whether they are doing it the right way or missing out anything. A logical analysis needs to be performed for the company so as to align the income of the company with all of its financial plans for the education of the children, buying a new car, retirement plan etc.
Key Issues
The balance sheet and the income statements based on the current inflows and outflows of the family and based on their current liabilities and assets have been prepared as shown in the appendix. The current financial condition is not good for the company. The outflows for the company are much higher as compared to the inflows of the family.
The family is currently relying upon the credit card as a source of cash for their family and this is because the family is facing the cash crunch. Credit card is an expensive source of financing for the family and this extra debt is putting more burden over the inflows of the company which is the total monthly income of $80000. Along with the burden of the credit card payment for the family, the family also has to pay outstanding mortgage loan and the car loan payments. This puts extra debt burden over the family.
These all burdens make it impossible for the family to save any income so that they could buy a new car, save the money and develop a retirement plan and plan the future education of their children. The life style of the living of the Smith Family also seems to be one of the contributing factor to the increased cash problems as the monthly expenses show expenses for restaurants and other expenditures also. Around $5400 is being spend by the Smith Family on outside dinners or might be night out expenses incurred by the family.
Apart from this, since the company is not repaying its mortgage that it had taken to buy the house worth $200000, therefore, the interest payments on this mortgage are increasing significantly for the family. The current outstanding mortgage balance for the family to be paid is $130,924 witha semi-annual interest rate of 6.5% which translates into 6.60% effective interest rate, making an expected outflow of $8640 per an num for the family which is significant.
The credit card limit has been exhausted for the Smith Family and the family has been paying an interest of about 21.9% on a monthly basis on its credit card on a compounding basis. The savings of the family that are invested yield an interest of about 4.9% for the family and this is very much low as compared to the interest rate applicable on the credit card. Further, the family has not opted for the Registered Educations Savings Plan which is basically a contract in Canada between the parents and the individual. All of these issues together have resulted in financial problems being faced by the Smith Family.
Analysis
The after tax monthly income for the Smith Family of $4800 per month is less than the total monthly expenses as shown by the income statement that has been prepared for the family. The major expanses that are contributing significantly to the outflows of the management are mortgage payments, car loan payments, groceries, school programs contributing about 18.17%, 10.83%, 15.63% and 17.71% respectively. The debt servicing and the payments on the outstanding loans of the company amount to 29%...........................
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