Question

WORKING CAPITAL MANAGEMENT
You have recently been hired to work in your company’s newly established treasury department. The company is a small company that produces cardboard boxes in a variety of sizes for different purchases. The owner of the company, works primarily in the sales and production areas of the company. 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 have been brought in to do.
The company currently has a cash balance of $305,000 and it plans to purchase new box-folding machinery in the fourth quarter at a cost of $525,000. The machinery will be purchased with cash because of a discount offered. The company’s policy is to maintain a minimum cash balance of #125,000. All sales and purchases are made on credit.
The owner has projected the following gross sales for each of the next four quarters.

                             Q1                               Q2                          Q3                       Q4

Gross sales $1,310,000 $1,390,000 $1,440,000         $1,530,000

Also, gross sales for the first quarter of the next year are projected at $1,405,000. The company currently has an accounts receivable period of 53 days and an accounts receivable balance of $645,000. 20% of the accounts receivable balance is from a company that has just entered bankruptcy, and it is likely this portion of the accounts receivable will never be collected.
The company typically orders 50% of the next quarter’s projected gross sales in the current quarter, and suppliers are typically paid in 42 days. Wages, taxes and other costs run about 30% of gross sales. The company has a quarterly interest payment of $135,000 on its long tern debt.
The company uses a local bank for its short-term financial needs. It pays 1.5% per quarter on all short-term borrowing and maintains a money market accounts that pays 1% per quarter on all short-term deposits.
You have been asked to prepare a cash budget and short-term financial plan for the company under the current policies. You have also been asked to prepare additional/alternative plans based on changes in several inputs.

Respond to the following questions. Written responses must comprise at least three complete sentences, with proper grammar and punctuation. Cite any referenced materials using APA format. In the Excel spreadsheets provided, all calculations that support your answers must be shown as formulae.
1. Use the numbers given to complete the cash budget and short-tern financial plan in Excel. (Sheet 1)
2. Rework the cash budget and short-term financial plan assuming the minimum balance is changed to $100,000 (Sheet 2)
3. You have looked at the credit policy offered by the competition and determined that the industry standard credit policy is 1/19 net 40. The discount will begin to be offered on the first day of the first quarter. You want to examine how this credit policy would affect the cash budget and short-term financial plan. If this credit policy is implemented, you believe that 40% of all sales will take advantage of it, and the outstanding accounts receivable period will decline to 36 days.
a. Rework the cash budget and short-term financial plan under the new credit policy and a minimum cash balance of $100,000. (Sheet 3)
b. What interest rate are you effectively offering your customers?
4. You have talked to the company’s suppliers about the credit terms that you receive. Currently, the company receives terms of net 45. The suppliers have stated that they would offer new credit terms of 1.5/15, net 40. The discount would begin to be offered on the first day of the first quarter.
a. What interest rate are suppliers offering the company?
b. Rework the cash budget and short-term financial plan assuming you take the offered credit terms on all orders and the minimum cash balance is $100,000. Also assume the company offers the credit terms detailed in Question 3. (Sheet 4)

CASH BUDGET
		Q1	Q2	Q3	Q4
Target Cash Balance
Net Cash inflow
Ending cash balance
Minimum Cahs balance
Cumulative surplus/(deficit)

Answer 1

Cash Budget
	Q1	Q2	Q3	Q4
Opening cash Balance	305,000	125,000	125,000	125,000
Receips from
Account receivable(WN 1)	516,000	1,310,000	1,390,000	1,440,000
Short term borrowings	487,000	-		449,022
Interest on short term deposits @1% per qtr	-	-	-
Total	1,308,000	1,435,000	1,515,000	2,014,022
Payment to
Purchse of new box folding machinery				525,000
Suppliers(WN 2)	655,000	695,000	720,000	765,000
Wages,taxes and other cost @30% of gross sales in the qtr	393,000	417,000	432,000	459,000
Interest on long term debt	135,000	135,000	135,000	135,000
Interest on short term borrowings @ 1.5%per qtr	-	7,305	6,470	5,022
Reapyment of borrowings		55,695	96,530	-
Short term deposits	-	-	-	-
Total Payment	1,183,000	1,310,000	1,390,000	1,889,022
Closing Cash balance	125,000	125,000	125,000	125,000

WN 1 Calculation for account receivable and paymnet to suppliers
	Opening bal.	Q1	Q2	Q3	Q4	Next qtr
Gross sales		1,310,000	1,390,000	1,440,000	1,530,000	1,405,000
Account receivable	645,000
80% is received in QTR1 from account receivable		645000*80%=516000	1,310,000	1,390,000	1,440,000
Order to suplliers =50% of projected sales of next qtr	1310000*50%=655000	1390000*50%=695000	1440000*50%=720000	1530000*50%=765000	1405000*50%=702500
Payment to suppliers		655,000	695,000	720,000	765,000

Assumption: It is assumed that amount received from account receivable which takes 53 days and payment to suppliers which takes 42 days falls in the next qtr to the qtr in which sales or purchase is made.

Minimum cash balance of $125000 has to be maintained, so deficit in Qtr 1 & Qtr 4 has been sorted by short term borrowing @1.5% per qtr and surplus in Qtr 2 & Qtr 3 has been used for payment of borrwings instead of short term deposits which yield 1% per qtr.

Cash Budget
	Q1	Q2	Q3	Q4
Opening cash Balance	305,000	100,000	100,000	100,000
Receips from
Account receivable(WN 1)	516,000	1,310,000	1,390,000	1,440,000
Short term borrowings	462,000	-		448,635
Interest on short term deposits @1% per qtr	-	-	-
Total	1,283,000	1,410,000	1,490,000	1,988,635
Payment to
Purchse of new box folding machinery				525,000
Suppliers(WN 2)	655,000	695,000	720,000	765,000
Wages,taxes and other cost @30% of gross sales in the qtr	393,000	417,000	432,000	459,000
Interest on long term debt	135,000	135,000	135,000	135,000
Interest on short term borrowings @ 1.5%per qtr	-	6,930	6,089	4,635
Reapyment of borrowings		56,070	96,911	-
Short term deposits	-	-	-	-
Total Payment	1,183,000	1,310,000	1,390,000	1,888,635
Closing Cash balance	100,000	100,000	100,000	100,000

Cash Budget
When Cash balance of $125000 has to be maintained
	Q1	Q2	Q3	Q4
Target Cash Balance	$125,000	$125,000	$125,000	$125,000
Net cash Inflow	516000	1310000	1390000	1440000
Opening Cash Balance	305000	$125,000	$125,000	$125,000
Net cash outflow	1183000	1254305	1293470	1889022
Ending Cash Balance	(362,000)	180,695	221,530	(324,022)
Minimum Cash Balance	$125,000	$125,000	$125,000	$125,000
Cumulative Surplus/(Deficit)	(487,000)	55,695	96,530	(449,022)
Short term Borrowing/(Repayment of borrowing)	487,000	(55,695)	(96,530)	449,022
When Cash balance of $100000 has to be maintained
	Q1	Q2	Q3	Q4
Target Cash Balance	$100,000	$100,000	$100,000	$100,000
Net cash Inflow	516000	1310000	1390000	1440000
Opening Cash Balance	305000	$100,000	$100,000	$100,000
Net cash outflow	1183000	1253930	1293089	1888635
Ending Cash Balance	(362,000)	156,070	196,911	(348,635)
Minimum Cash Balance	$100,000	$100,000	$100,000	$100,000
Cumulative Surplus/(Deficit)	(462,000)	56,070	96,911	(448,635)
Short term Borrowing/(Repayment of borrowing)	462,000	(56,070)	(96,911)	448,635