$223,000, and $240,000 in July, August, and September, respectively. The profit- and-loss-statement for the last three months (April-June) is shown in Exhibit 1. Tim estimates that the cost of sales will stay very close to 62 percent of sales and that the general & administrative expense will average 8.8 percent over the next three months. Depreciation and interest expenses will remain unchanged over the next three months and taxes (federal and state) will average 38 percent. Triad Campers never had a cash budget, but Tim's accountant had set up an excellent system for keeping the records of collections and payments. From these Tim learned that about 10 percent of sales are paid for in the month of purchase and 75 percent of the sales are paid about 90 days after the sale. Another 12 percent are paid within 120 days and 3 percent are written off as uncollectible. That last number surprised Tim, who knew that a few dealers had not paid due to disagreements over damaged trailers and that a few dealers had gone out of business, declared bankruptcy, or were seeking court protection from creditors under chapter 11 of the bankruptcy laws. To determine the cash outflow, Tim learned that purchases were about 32 per- cent of each month's sales and that salaries were $4,200 per month. Wages aver- aged 19.5 percent of sales, direct factory was 4.9 percent of sales, and administration expenses, which were $11,000 in June, were rising $500 per month. Selling expenses were constant at 7.8 percent of sales, and Tim's account- ant told him that he had a lease payment of $19,000 in July and an expected tax payment of $19,800 in September. Tim had tried to maintain a minimum cash balance of $15,000, and by the end of June the firm had borrowed $57,000 on its $60,000 line of credit from the bank. (March sales had been $112,255.) QUESTIONS 1. Calculate the cash flow budget and a pro forma profit and loss statement for Triad Campers for the coming July-September quarter. 2. How much increase in his line of credit will Tim need for the July-September quarter? If the increase is not granted, what can Tim Cook do? 3. If sales are 20 percent greater than the July-September forecast, what will be the dollar effect on the cash flow and the profit and loss statements? 4. If sales are 30 percent less than the July-September forecast, what will be the dollar effect on the cash flow and the profit and loss statements? 5. In an attempt to encourage dealers to pay sooner, Tim offered terms of 2/10, net 90. Do you find it surprising that only 10 percent of his customers took advantage of the discount and paid within 10 days? Defend your answer. 6. Tim apparently thought that high profits guaranteed adequate cash to pay any bills as they came due. Explain to Tim the difference between profit and cash flow. In particular, explain how even a profitable, highly efficient firm can experience "cash crunches and have a need for outside capital. EXHIBIT 1 Triad Campers Profit and Loss Statement April May June Net sales Cost of sales Gross profit General & administrative expenses Depreciation Interest Income before taxes Taxes Net income $148,700 92,194 $56,506 13,383 14,430 7,917 $20,776 7,895 $12,881 $165,800 102,796 $63,004 14,622 14,430 7,917 $26,035 9,893 $16,142 $183,600 113,832 $69,768 16,224 14,430 7,917 $31,197 11,855 $19,342 $223,000, and $240,000 in July, August, and September, respectively. The profit- and-loss-statement for the last three months (April-June) is shown in Exhibit 1. Tim estimates that the cost of sales will stay very close to 62 percent of sales and that the general & administrative expense will average 8.8 percent over the next three months. Depreciation and interest expenses will remain unchanged over the next three months and taxes (federal and state) will average 38 percent. Triad Campers never had a cash budget, but Tim's accountant had set up an excellent system for keeping the records of collections and payments. From these Tim learned that about 10 percent of sales are paid for in the month of purchase and 75 percent of the sales are paid about 90 days after the sale. Another 12 percent are paid within 120 days and 3 percent are written off as uncollectible. That last number surprised Tim, who knew that a few dealers had not paid due to disagreements over damaged trailers and that a few dealers had gone out of business, declared bankruptcy, or were seeking court protection from creditors under chapter 11 of the bankruptcy laws. To determine the cash outflow, Tim learned that purchases were about 32 per- cent of each month's sales and that salaries were $4,200 per month. Wages aver- aged 19.5 percent of sales, direct factory was 4.9 percent of sales, and administration expenses, which were $11,000 in June, were rising $500 per month. Selling expenses were constant at 7.8 percent of sales, and Tim's account- ant told him that he had a lease payment of $19,000 in July and an expected tax payment of $19,800 in September. Tim had tried to maintain a minimum cash balance of $15,000, and by the end of June the firm had borrowed $57,000 on its $60,000 line of credit from the bank. (March sales had been $112,255.) QUESTIONS 1. Calculate the cash flow budget and a pro forma profit and loss statement for Triad Campers for the coming July-September quarter. 2. How much increase in his line of credit will Tim need for the July-September quarter? If the increase is not granted, what can Tim Cook do? 3. If sales are 20 percent greater than the July-September forecast, what will be the dollar effect on the cash flow and the profit and loss statements? 4. If sales are 30 percent less than the July-September forecast, what will be the dollar effect on the cash flow and the profit and loss statements? 5. In an attempt to encourage dealers to pay sooner, Tim offered terms of 2/10, net 90. Do you find it surprising that only 10 percent of his customers took advantage of the discount and paid within 10 days? Defend your answer. 6. Tim apparently thought that high profits guaranteed adequate cash to pay any bills as they came due. Explain to Tim the difference between profit and cash flow. In particular, explain how even a profitable, highly efficient firm can experience "cash crunches and have a need for outside capital. EXHIBIT 1 Triad Campers Profit and Loss Statement April May June Net sales Cost of sales Gross profit General & administrative expenses Depreciation Interest Income before taxes Taxes Net income $148,700 92,194 $56,506 13,383 14,430 7,917 $20,776 7,895 $12,881 $165,800 102,796 $63,004 14,622 14,430 7,917 $26,035 9,893 $16,142 $183,600 113,832 $69,768 16,224 14,430 7,917 $31,197 11,855 $19,342