Question

CASH FLOW CONCERNS Three months ago Harding had prepared a cash flow forecast for the period October 1995 to May 1996. 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 shortfall. 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 JUST NEED HELP WITH QUESTION 2

Answer 1

To start, let's first write down the sources and uses of cash for Deerpark in a month.

Sources:

1. 70% of sales generated during the month
2. 30% of sales generated during the previous month

Uses:

1. Payroll expenses
2. 50% of purveyor expenses incurred in the previous month
3. 50% of purveyor expenses incurred two months back
4. Mortgage
5. Utilities and maintenance
6. Lease, rental and other miscellaneous expenses

In addition to the above expenses, the resort will also have to pay

1. Property taxes in Feb-96
2. Income taxes in Dec-95 and Mar-96

Using the above data, we get the following cash budget for the period Oct-95 through Mar-96.

Particulars	Oct-95	Nov-95	Dec-95	Jan-96	Feb-96	Mar-96
Opening cash balance (A)	550.00	672.75	737.36	666.38	567.24	370.68
Sources
70% of current month sales	426.65	259.21	180.18	124.74	141.68	201.74
30% of previous month sales	134.40	182.85	111.09	77.22	53.46	60.72
Uses
Payroll expenses	(163.30)	(120.70)	(112.20)	(82.50)	(85.80)	(99.00)
50% Purveyor expenses of previous month	(60.00)	(51.75)	(48.30)	(25.30)	(28.60)	(41.25)
50% Purveyor expenses two months back	(70.00)	(60.00)	(51.75)	(48.30)	(25.30)	(28.60)
Mortgage	(50.00)	(50.00)	(50.00)	(50.00)	(50.00)	(50.00)
Utilities and Maintenance	(70.00)	(70.00)	(70.00)	(70.00)	(70.00)	(70.00)
Lease, Rental & Miscellaneous	(25.00)	(25.00)	(25.00)	(25.00)	(25.00)	(25.00)
Property tax	-	-	-	-	(107.00)	-
Income tax	-	-	(5.00)	-	-	(5.00)
Change in cash (B) (net of sources & uses)	122.75	64.61	(70.98)	(99.14)	(196.56)	(56.39)
Closing cash balance (A+B)	672.75	737.36	666.38	567.24	370.68	314.29

When we include the renovation expenses of $500,000 in Jan-96, the cash budget will be as given below:

Particulars	Oct-95	Nov-95	Dec-95	Jan-96	Feb-96	Mar-96
Opening cash balance (A)	550.00	672.75	737.36	666.38	67.24	(129.32)
Sources
70% of current month sales	426.65	259.21	180.18	124.74	141.68	201.74
30% of previous month sales	134.40	182.85	111.09	77.22	53.46	60.72
Uses
Payroll expenses	(163.30)	(120.70)	(112.20)	(82.50)	(85.80)	(99.00)
50% Purveyor expenses of prev month	(60.00)	(51.75)	(48.30)	(25.30)	(28.60)	(41.25)
50% Purveyor expenses two months back	(70.00)	(60.00)	(51.75)	(48.30)	(25.30)	(28.60)
Mortgage	(50.00)	(50.00)	(50.00)	(50.00)	(50.00)	(50.00)
Utilities and Maintenance	(70.00)	(70.00)	(70.00)	(70.00)	(70.00)	(70.00)
Lease, Rental & Miscellaneous	(25.00)	(25.00)	(25.00)	(25.00)	(25.00)	(25.00)
Renovation	-	-	-	(500.00)	-	-
Property tax	-	-	-	-	(107.00)	-
Income tax	-	-	(5.00)	-	-	(5.00)
Change in cash (B) (net of sources & uses)	122.75	64.61	(70.98)	(599.14)	(196.56)	(56.39)
Closing cash balance (A+B)	672.75	737.36	666.38	67.24	(129.32)	(185.71)

As per the above budget, the resort is expected to face cash deficits in Feb-96 and Mar-96 and the cash balance in Dec-95 is estimated to be below the minimum required cash balance of $100,000. Hence, Deerpark will have to hold the payments to its purveyors starting from Dec-95 plus $1,770 of such payments in Nov-95, if it is to undertake the renovation in Jan-96 and maintain the minimum cash balance.