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:

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 Keafer currently has an accounts receivable period of 57 days and an accounts receivable balance of $683,000. 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 Keafer 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 $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.

1. Use the numbers given to complete the cash budget and short-term financial plan.

2. Rework the cash budget and short-term financial plan assuming Keafer changes to a minimum cash balance of $100,000.

3. Rework the sales budget assuming an 11 percent growth rate in sales and a 5 percent growth rate in sales. Assume a $100,000 target cash balance.

4. Assuming the company€™s sales grow at 8 percent, what target cash balance would result in a zero need for short term financing? To answer this question, you may need to set up a spreadsheet and use the €œSolver€ function.

5. You have looked at competitors€™ credit policies and have determined that the industry standard credit policy is 1/10, net 45. The interpretation of these credit terms is that a purchaser will receive a 1 percent discount on sales if it pays within 10 days. If the purchaser does not pay within 10 days, the full sales price is due in 45 days. You want to examine how a switch to this credit policy would affect your cash budget and short-term financial plan. If this credit policy is implemented, you estimate that 25 percent of all customers will take advantage of it, and the accounts receivable period will decline to 38 days. Rework the cash budget and short-term financial plan under the new credit policy and a minimum cash balance of $100,000. What interest rate is implied by the credit terms?

6. You have talked to the company€™s main supplier about the credit terms Keafer receives. The supplier has stated that it would be willing to offer new credit terms of 2/15, net 40. The interpretation of these credit terms is that Keafer will receive a 2 percent discount on sales if it pays within 15 days. If it does not pay within 15 days, the full sales price will be due in 40 days. What interest rate are the suppliers offering the company? Rework the cash budget and short-term financial plan assuming you take the credit terms on all orders and the minimum cash balance is $100,000.

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Q2 Q3 Q4 04 01 Gross sales $893,000 $996,000 $924,000 $858,000