Question

KEAFER MANUFACTURING WORKING CAPITAL MANAGEMENT You have recently been hired by Keafer Manufacturing to work in its newly established treasury department. Keafer Manufacturing is a small company that produces highly customized cardboard boxes in a variety of sizes for different purchasers. Adam Keafer, 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 $170,000, and it plans to purchase new machinery in the third quarter at a cost of $325,000. 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 $130,000 to guard against unforeseen contingencies. All of Keafer'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 $893,000 $924,000 $996,000 $858,000 After some research and discussions with customers, you're projecting that sales will be 8 percent higher in each quarter next year. Sales for first quarter of the following year are also expected to grow at 8 percent. You calculate that Keafer currently has an accounts receivable period of 57 days and an accounts company that has just entered bankruptcy, and it is likely that this portion will never be collected. You've also calculated that Keafer typically orders supplies each quarter in the amount of 50 percent of the next quarter's projected gross sales, and supplies 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 $190,000 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

	KAEFER MANUFACTURING
	CASH BUDGET
		Q1	Q2	Q3	Q4	Q1
	Budgeted Sales	964440	997920	1075680	926640	1041595
	Collections from Sales
	From Current Quarter	353628	365904	394416	339768
	From Previous Quarter	614700	610812	632016	681264
	Total Collections	968328	976716	1026432	1021032
	Payment to Suppliers Current Quarter	205128	221112	190476	214105.7
	Payment to Suppliers Previous Quarter	283974	293832	316728	272844
	Wages, Taxes and Other Costs	241110	249480	268920	231660
	Interest on Long Term Debt	190000	190000	190000	190000
	Capital Expenditures	0	0	325000	0
	Total Payments	920212	954424	1291124	908609.7
	Net Cash Inflow	48116	22292	-264692	112422.3
	Short Term Financial Plan
	Beginning Cash Balance	130000	130000	130000	130000
	Net Cash Inflow	48116	22292	-264692	112422
	Income on short term Investments	200	442	555	0
	New Short term Investments	-48316	-22734	0	0
	Short term Investments Sold	0	0	111050	0
	New Short Term Borrowing	0	0	153087
	Interest on Short Term Borrowing	0	0	0	1837
	Short Term Borrowing Repaid	0	0	0	-114259
	Ending Cash balance	130000	130000	130000	130000
	Minimum Cash balance	130000	130000	130000	130000
	Surplus/ Deficit	0	0	0	0
	Beginning Short term Investments	40000	88316	111050	0
	Ending Short Term Investments	88316	111050	0	0
	Beginning Short Term Loan	0	0	0	153087
	Ending Short term Loan	0	0	153087	38828
	Collections
	A 57 days cllection Period Means (90-57)/90 from Current Quarter	0.366666667
	and Remaining From Previous Quarter
	Payments to Suppliers is 50% of Next Quarters Projected Sales
	And Payable Period is 53 Days
	So Payment to Suppliers for Previous Quarter = 50% of Next Quarter's Sales *(90-53)/90	0.411111111
Q1	Excess fund Start at $40000 invested for 1st Quarter earns .5% on $40000	200
Q2	Excess fund of 88316 invested earns .5% $88316	442
Q3	Excess fund of Rs. 111050 invested Earns .5 % *$111050	555
Q4	Interest on Short Term Loan of $153087 @ 1.2%	1837