Question

PIEPKORN MANUFACTURING WORKING CAPITAL MANAGEMENT, PART 1

You have recently been hired by Piepkorn Manufacturing to work in its newly established treasury department. Piepkorn Manufacturing is a small company that produces cardboard boxes in a variety of sizes. Gary Piepkorn, the owner of the company, works primarily in the sales and production areas. Currently, the company puts all receivables in one shoe box and all payables in another. Because of the disorganized system, the finance area needs work, and that's what you've been brought in to do. The company currently has a cash balance of $154,000 and plans to purchase new box folding machinery in the fourth quarter at a cost of $325,000. The purchase of the machinery will be made with cash because of the discount offered. The company's policy is to maintain a target cash balance of $100,000. All sales are in cash and all purchases are made on credit. Gary Piepkorn has projected the following gross sales for each of the next four quarters:

Quarters	01	02	03	04
Gross Sales	$863,500	$918,500	$996,000	$924,000

Gross sales for the first quarter of next year are projected at $908,000. Piepkorn typically orders 50 percent of next quarter's projected gross sales in the current quarter, and suppliers are typically paid in 53 days. Wages, taxes, and other costs run about 30 percent of gross sales. The company has a quarterly interest payment of $115,000 on its long-term debt. The company uses a local bank for its short-term financial needs. It pays 1.5 percent per quarter on all short-term borrowing and maintains a money market account that pays 1 percent per quarter on all short-term deposits. Gary has asked you to prepare a cash budget and short-term financial plan for the company under the current policies. He has also asked you to prepare additional plans based on changes in several inputs.

QUESTIONS

a. Use the numbers given to complete the cash budget and short-term financial plan.

b. Rework the cash budget and short-term financial plan assuming Piepkorn changes to a target balance of $80,000.

PIEPKORN MANUFACTURING Short-Term Financial Plan
	Q1	Q2	Q3	Q4
Beginning cash balance
Net cash inflow
Ending cash balance
Minimum cash balance
Cumulative surplus (deficit)

PIEPKORN MANUFACTURING Short-Term Financial Plan
	Q1	Q2	Q3	Q4
Target cash balance
Net cash inflow
New short-term investments
Income from short-term investments
Short-term investments sold
New short-term borrowing
Interest on short-term borrowing
Short-term borrowing repaid
Ending cash balance
Minimum cash balance
Cumulative surplus (deficit)
Beginning short-term investments
Ending short-term investments
Beginning short-term debt
Ending short-term debt

Answer 1

Answer :

Given data :

Cash balance of the company(Beginning) = $ 154,000

Cost of new machinery = $325,000

Target cash balance = $ 80,000

sales of the company is on cash basis.

And purchases is on credit basis.

Required amount pay as interest = $ 115,000

Required amount interest borrowed by the company = 1.5%

Extra money keeping it in market a/c of interest = 1% per quarter

Beginning receivable or payables of quarter balance will be paid to present quarter.

Payable periods = 53 days

Therefore,

calculate Purchases for current quarter in factors :

= 90 - Collection period / 90

= 90 - 53 / 90

= 37 / 90

i.e 37/90 pf the purchases is in same quarter and remaining purchases of 53/90 is in next quarter.

SO now,

The formula for payables of purchases is below :

Payables paid = * Current Q payables + 53/90 * Previous Q payables

=37/90 * Current Q payables + 53/90 * Previous Q payables.

a)Use the numbers given to complete the cash budget and short-term financial plan.

Cash budget as follows :

Cash budget financial plan
Particulars	Amount
	Q1	Q2	Q3	Q4
Beginning cash balance	$154000	$200,394	$253,164	$352,164
Net cash flow	$46,394	$52,770	$99,000	-$251,911
Ending cash balance	$200,394	$253,164	$352,164	$100,253
cumulative surplus	$120,394	$173,164,	$272,164	$20,253

prepare the short term financial plan as follows :

prepare the short term financial plan as follows
Particulars	Amount
	Q1	Q2	Q3	Q4
Target cash balance	80,000	80,000	80,000	80,000
net cash inflow	46,394	52770	99,000	-251,911
new short term investments	-47,394	-53,981.34	-100,751.15	0
income from short term investments at 1% per quarter	740	1211.34	1751.15	2758.66
short term investments sold	0	0	0	0
net short term borrowing	0	0	0	0
interest on short term ot 1.5 % per quarter	0	0	0	0
Short term borrowing repaid	0	0	0	0
Ending cash balance	80,000	80,000	80,000	80,000
Minimum cash balance	80,000	80,000	80,000	80,000
Cumulative surplus	0	0	0	0
Beginning sort term investments	74,000	721,134.00	175,115.34	275,866.49
Ending short term investments	121134	17511534	27586649	26714.15
Beginning short term debt	0	0	0	0
Ending short term debt	0	0	0	0

Explanation :

Beginning cash balance of the company is $154,000.Minimum cash balance is $ 80,000.

Now,Beginning cash balance - Minimum cash balance = $154,000 - $ 80,000=$74,000

So,This remaining amount will be invested in short term investment of Interest 1%.Then the company earns interest is invested in first quarter and remaining amount invested in remaining quarters.

when the company need more amount then it will use the short term investments,then the company get short term amount value by getting increase debt of 1.5% interest per quarter.

Short term investments of interest can be done based on beginnning short term investments.

b)Rework the cash budget and short-term financial plan assuming Piepkorn changes to a target balance of $80,000.

Here, we need to calculate the new short term investments :

First short term investment on Q1,Q2,Q3,Q4 :

Q1 :

Where TCB = Target cash balance

NCI = Net cash inflow

ISTI = Income from short term investment

CB = Cash balance

= TCB + NCI + ISTI - Minimum CB

= $80,000 +$46,394 + 740 - $ 80,000

= 127,134 - 80,000

= $47,134.

= $47,134.

Q2 :

= TCB + NCI + ISTI - Minimum CB

= $80,000 + $52,770 + 1211.34 - $80,000

= 133981.34 - $ 80,000

= $ 53,981.34

= $ 53,981.34

Q3 :

= TCB + NCI + ISTI - Minimum CB

= $80,000 + $99,000 + 1751.15 - $80,000

= 180.751.15 - $ 80,000

= $100,751.15

= $100,751.15​​​​​​​

Q4 :

= TCB + NCI + ISTI - Minimum CB

= $80,000 + (-$251,911) + 2758.66 - $80,000

= 2758.66 - 243911 - $ 80,000

= 2758.66 - 323,911

= $ 249,152.34

= $249,152.34