Cash Management and Forecasting Falmouth Enterprises sells a popular household product to retailers and small service companies. The company has been having cash difficulties lately and is concerned about the cash position for the next month. As the assistant to the chief financial officer, you have been asked to prepare a cash forecast for the month of May. You gather the following information to assist you in preparing the forecast:

1. The company’s sales forecast projects sales of 100,000 units at $12 each during May. This forecast reflects a significant increase in sales, a trend that is expected to continue over the next year.

2. Payments for all sales are due in 60 days, and virtually all customers wait until the due date to pay.

3. Sales for March were 60,000 units, and sales for April appear to be headed towards 75,000 units.

4. The sales price has not changed for almost a year.

5. Approximately | percent of all sales are never collected.

6. The company orders all of its product electronically, and receipt of the goods takes place within two days of placing orders. Therefore, the amount of inventory on hand at month-end always is negligible.

7. The company is billed at the end of each month for its purchases of product during the month. The company always pays immediately and receives a 2 percent discount on the purchase price of the product.

8. The company has been paying $6.75 per unit for its product until the beginning of April, when the price was raised to $7.00 per unit. In addition, the company must pay freight charges at the time of delivery of $.25 per unit (not discountable).

9. Labor payments for May are expected to total $250,000.

10. Cash payments for utility, rent, and other miscellaneous expenses are expected to be $131,000 for the month of May.

11. The cash balance at the end of April is expected to be

$51,000.

12. Company policy dictates maintaining a cash balance of at least $50,000.

13. Any cash balances that exceed $50,000 at the beginning of the month and that are not expected to be needed during the next month are transferred to a savings account earning 5 percent annually.

14. Any expected cash shortfalls during the month are made up through borrowing. The company’s only borrowing options are as follows:

a. Borrow money for two months at a 12 percent annual rate, with no additional loan costs.

b. Borrow money for one year at 8 percent interest, with a $500 loan arrangement fee, payable on receipt of the loan.

Required:

a. Prepare the cash forecast for May, showing separately all expected cash inflows and cash outflows. Neatly show all of your computations in separate supporting schedules.

b. If Falmouth Enterprises must resort to outside borrowing, which of the two available alternatives would you recommend? Why?

c. What steps might you recommend to your boss to improve the company’s cash management practices? Support your recommendations.