Question:
You work for Keafer Inc., a small, family-owned manufacturer of custom cardboard boxes. Up until now, payables and receivables were handled haphazardly with little planning. You have been hired to apply the skills you learned in business school to institute some formality to the process. Currently the firm has a cash balance of $115,000, with plans for a $200,000 capital investment in new machinery in the third quarter that will be paid from cash in order to obtain a discount. The CEO has indicated he would like a minimum cash balance of $90,000 to provide liquidity in case of any unforeseen contingencies. The company provides credit to all of its customers with terms of net 45 days. Quarterly sales for the year that just ended were: Q1, $565,000; Q2, $585,000; Q3, $628,000; and Q4, $545,000. You project quarterly sales will grow 8% over the coming year. Current receivables are $426,000 with an average collection period of 57 days. However, 10% of receivables are from a firm that just filed for bankruptcy and it is unlikely any of this will ever be collected. The firm purchases supplies using trade credit with terms of net 60 days. Keafer typically orders supplies equal to 50% of next quarter's gross sales, with an average payables period of 53 days. Wages, taxes and other costs run about 25% of current-quarter sales. The company also has a quarterly interest payment of $120,000 on its long-term debt. Your job is to prepare a cash budget for the company under the current policy. In addition, rework the analysis assuming an 11% growth in sales, and again assuming the original growth rate but minimum cash balance of $70,000. Write a short report explaining your analysis, you findings and your recommendations.