Question

CASH FLOW CONCERNS Three months ago Harding had prepared a cash flow forecast for the period October 1995 to May 19%. November through March is generally a slow period for the resort, and it is not unusual for the lodge to run cash deficits during most, if not all, of these months. However, the cash surplus generated during the peak period, from August through October, is typically sufficient to meet the shortfal. This is precisely what Harding had predicted would occur when he had made the cash budget projection in July. But now, in early October, he is having second thoughts about the forecast Three factors concern Harding. First, the renovations planned for January need to be more extensive than originally thought. Harding had estimated the cost to be $420,000, but it appears $500,000 of work is necessary. Second, the resort's long-time sales manager left unexpectedly in August and her replace ment does not seem to be as effective in obtaining convention business. Third, a recession has hit much of the area and Deerpark's sales are definitely sensi tive to the state of the regional economy. All this suggests Harding's sales forecasts, which he had labeled "conservative" in July, are too high. "I can see indications of this now," he tells Purcell. "Revenue is off 10 percent for September and October, and our advance bookings for the rest of the year are also down. I'm sure we won't hit the levels we predicted." Harding has always been an advocate of cash budget forecasts and constantly revises an estimate in light of new information. There is no doubt a new projection is necessary.

i need help with questions 9 & 10. FINANCE EXPERTS ONLY.

Answer 1

Answer:-

Q 9)

The most important variable in cash budget forecast is sales. The sales of the company primarily decides how much cash is required for the company to produce the goods. The estimation of sales helps the company in allocating the budget that is required to purchase the raw materials and maintain the inventory levels that is required to meet the demand for the product.

The sales projection should be done keeping in view the demand and the business cycle. The recession or slowdown leads to lower the sales.  The company should monitor the business cycle especially if its a cyclical business where the demand fluctuates if the production time taken is high ie the time taken to convert raw materials to finished goods. This will also help the company to maintain the inventory levels at all the three levels of raw materials, work in process and finished goods.

Q 10)

Th cash budget is more important financial tool for Deerpark than Exxon as the smaller the scale of the company the more important it is to manage the cash budget.The smaller companies have to meet short term obligation and liquidity needs and it becomes difficult sometimes when there is lower access to funds during periods of credit tightening from banks and lenders during recession.

As the bigger companies like Exxon have more access to funds ie. they can raise funds easily by borrowing loans from banks, issuing commercial papers if they have good credit rating and tapping the market via IPO ( Initial public offer) or FPO ( follow on public offer) ie. via primary sale or secondary sale. The larger firms can also borrow funds externally to meet their financial needs.

The options for raising capital for smaller firms like Deerpark are lower compared to larger firms like Exxon. The smaller firms are more vulnerable to the business cycle and during recession there are lot of chances that the company may be adversely effected and face bankruptcy because there are more chances that the profitability will come down due to lower sales and lower margins. The smaller firms are also susceptible for ratings downgrade which increases the cost of borrowing which rises the interest expense leading to lower net profit.