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

The cash flow each quarter will consist of the sales collection, minus the suppliers paid, expenses, dividends, interest, and capital outlays. The cash flows for each quarter will be:

Cash Flow 91 02 $607,500.00 $753,768.00 23 04 $780,444.00 $ 769,500.00 436,392.00 451,836.00 445,500.00 420.948.00 -350,436.00 -362.838.00 -357,750.00 -338.034.00 Collections from previous quarter Collections from current quarter sales Payments to suppliers for previous quarter Payments to suppliers for current quarter Expenses Dividends and interest Outlay Net cash flow -253,302.00 -249,750.00 -235.986.00 -264.215.52 -297,540.00 -308,070.00 -303,750.00 -287,010.00 -185,000.00 -185,000.00 -185,000.00 -185,000.00 -390,000.00 -$42,386.00 $99,946.00 -$246,542.00 $116.188.48 Q2 03 Beginning cash balance Net cash inflow Ending cash balance Minimum cash balance Cumulative surplus -deficit Cash Balance QI $210,000.00 $167,614.00 $267,560.00 $21,018.00 -42,386.00 99,946.00 -246,542.00 116,188.48 $167,614.00 $267,560.00 $21,018.00 $137,206.48 135,000.00 135,000.00 135,000.00 135,000.00 $32,614.00 $132.560.00 $113,982.00 $2,206.48

The short-term financial plan looks like this:

Target cash balance Net cash inflow New short-term investments Income on 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 Short-term Financial Plan $135,000.00 $135,000.00 -42,386.00 99,946.00 0 -100,321.00 375.00 375.00 42,011.00 0 0 0 $135,000.00 $135,000.00 -246,542.00 116,188.48 0 -44,999.95 876.61 175,321.00 0 70,344.40 0 0 -844.13 0 -70,344.40 $135,000.00 $135,000.00 -135,000.00 -135,000.00 $0 $0 0 0 0 0 $135,000.00 $135,000.00 -135,000.00 $0 -135,000.00 $0 $75,000.00 75,000.00 $75,000.00 175,321.00 Beginning short-term investments Ending short-term investments Beginning short-term debt Ending short-term debt $175,321.00 0 0 $70,344.40 $0 44,999.95 70,344.40 $0 0 0 $0 $0

The interest calculations for each quarter and the net cash cost are:

eams $375.00 eams $375.00 Q1: Excess funds at start of quarter of Q2: Excess funds at start of quarter of Q3: Excess funds at start of quarter of Q4: Shortage of funds at start of quarter of $75,000.00 $75,000.00 $175,321.00 $70,344.40 in income. inincome. inincome. ininterest eams $876.61 $844.13 costs Net cash cost Q1 Q2 Q3 Q4 Cash generated by short-term financing $375.00 375.00 876.61 844.13 $782.47