Question

I- KEASER MANUFACTURING WORKING CAPITAL MANAGEMENT (60 ptos)

You have recently been hired by Keaser Manufacturing to work in its established treasury department. Keaser Manufacturing is a small company that produces highly customized cardboard boxes in a variety of sizes for different purchasers. Adam Keaser, the owner of the company, works primarily in the sales and production areas of the company. Currently, the company basically puts all receivables in one pile and all payables in another, and a part-time bookkeeper periodically comes in and attacks the piles. Because of this 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 $210,000, and it plans to purchase new machinery in the third quarter at a cost of $390,000. The purchase of the machinery will be made with cash because of the discount offered for a cash purchase. Adam wants to maintain a minimum cash balance of $135,000 to guard against unforeseen contingencies. All of Keaser’s sales to customers and purchases from suppliers are made with credit, and no discounts are offered or taken.

The company had the following sales each quarter of the year just ended:

	Q1	Q2	Q3	Q4
Gross sales	$1,102,000	$1,141,000	$1,125,000	$1,063,000

After some research and discussions with customers, you’re projecting that sales will be 8 percent higher in each quarter next year. Sales for the first quarter of the following year are also expected to grow at 8 percent. You calculate that Keasercurrently has an accounts receivable period of 57 days and an accounts receivable balance of $675,000. However, 10 percent of the accounts receivable balance is from a company that has just entered bankruptcy, and it is likely that this portion will never be collected.

You’ve also calculated that Keaser typically orders supplies each quarter in the amount of 50 percent of the next quarter’s projected gross sales, and suppliers are paid in 53 days on average. Wages, taxes, and other costs run about 25 percent of gross sales. The company has a quarterly interest payment of $185,000 on its long-term debt. Finally, the company uses a local bank for its short-term financial needs. It currently pays 1.2 percent per quarter on all short-term borrowing and maintains a money market account that pays .5 percent per quarter on all short-term deposits.

Adam 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.

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

Answer 1

Ans)   Cash Budget and short term Financial Plan

		Quarter 1	Quarter 2	Quarter 3	Quarter 4
	Gross Sales (previous Quarter sales+8%)	114804	123988.32	133907.3856	144619.9764
	Opening Balance of Cash	210000	135000	135000	135000
Add:	Realisation from Debtors	649594.80	118171.58	127625.31	137835.34
Add:	Interest on Short term Deposits		2427.03656
			(485407.312*0.5%)
	Total(A)	859594.8	255598.6206	262625.31	272835.34
Less:	Wages ,Taxes and other Cost 25% of Sales	28701	30997.08	33476.85	36154.99
		(114804*0.25)	(123988.3*0.25)	(133907.4*0.25)	(144620*0.25)
Less:	Payment to creditors (Note 2)	25486.49	61994.16	66953.69	72309.99
Less:	Interest Payment on long term Debt	185000	185000	185000	185000
Less:	Purchase of Machine			390000
Less:	Interest on short term borrowing			1516.75	6591.86
				(126395.54*1.2%)	(549321.97*1.2%)
	Total (B)	239187.488	246994.16	676947.29	300056.85
	Cash Balance (A)-(B) {c}	620407.31	8604.46	-414321.97	-27221.51
	Minimum Cash Balance Required (D)	135000	135000	135000	135000
	Excess cash to be invested to get Interest of 0.5 % {c}-(D)	485407.312
	Cash short fall to be borrowed {c}-(D)		126395.54	-549321.97	-107778.49

Notes

1) Debtor Realisation Table

Sale (Previous Quarter sales+8%)		114804	123988.32	133907.3856	144619.9764
		Q1	Q2	Q3	Q4
Realisation of Previous year Sale (A)		607500
		(675000*90%)
Realisation of current Quarter Sale(B)		42094.8	45462.384	49099.37472	53027.3247
		(114804*33/90)	(123988.30*33/90)	(133907.4*33/90	(144620*33/90)
Realisation of previous quarter sales {C}			72709.20	78525.94	84808.01
Total Realisation (A+B+C)		649594.8	118171.584	127625.3107	137835.33

Since the Debtors are realising in 57 Days and we are assuming the quater of 90 Days, So the sale made upto 33rd day(90-57) will be realised in same quater and the remaining amount will be realised in next quater.

2) Creditors Payment table

Purchase (50% of Next quarter sale)		61994.16	66953.69	72309.98	78094.78{(144619.98*1.08)*0.5}
		Q1	Q2	Q3	Q4
Payment of the current Quarter (A)		25486.488	27525.40704	29727.4396	32105.63477
		(61994.16*37/90)	(66953.59*37/90)	(72309.98*37/90)	(78094.79*37/90)
Payment of previous quarter (B)			34468.75296	37226.2532	40204.35345
Total payment (A+B)		25486.488	61994.16	66953.69	72309.98

Since creditors are paid in 53 days and we are assuming the quater of 90 Days , So the purchase done upto 37th day (90-53) will be paid in current quater ,the rest will be paid in next quater.

Assumption

There are no closing creditors during previous year.

Quater is of 90 Days.

If you have any further query please let me know in the comments.

Happy to help you :)