CASE 3 WORKING CAPITAL MANAGEMENT Ohio Cast is a small private foundry located in Northeast Ohio. It manufactures street lamp posts. The company is currently run by your father and grandfather. The two men have extensive knowledge in the production and sales areas of the business. They are both excited that you will be graduating from college in a month and are bringing you on board as the thirdgeneration owner to help with the financial planning part of the business.

The company currently has a cash balance of $305,000. The companys policy is to maintain a minimum cash balance of $125,000. All of Ohio Casts sales to customers and purchases from suppliers are made with credit, but no discounts are offered or taken. However, the purchase of a new sand blaster is scheduled for the fourth quarter. It will cost $525,000 if paid with cash and your father wants to take advantage of the cash discount. Your father and grandfather have projected the following gross sales for the next four quarters:

Quarter 1 - $1,310,000

Quarter 2 - $1,390,000

Quarter 3 - $1,440,000

Quarter 4 - $1,530,000

Also, the gross sales for the first quarter of following year are projected at $1,405,000.

The company has accounts receivable balance of $645,000 but one of its clients (who is responsible for twenty percent of this balance) just declared bankruptcy and it is very likely that you will not be able to collect this portion of A/R. The companys DSO is 53 days.

Ohio Cast usually orders half of the next quartets projected gross sales during the current quarter. Suppliers are typically paid in 42 days. Wages, taxes and other costs run around 30 percent of gross sales. The company has a quarterly interest payment of $135,000 on its long-term debt.

Finally, the company has established a long history with a local bank for its short-term financial needs. It currently pays 1.5 percent per quarter on all short-term borrowing and maintains a money market account that pays one percent per quarter on all short-term deposits.

The companys book-keeper is retiring. He hasnt completed the cash budget and the short-term financial plan yet. It will be your first task on the job. You have looked at the financial statements of the company and believe that the required cash balance can be reduced by $25,000. You also found out that most of your competitors introduced a 1/10 net 40 credit policy. You feel that some of your long-time clients may be tempted to switch to competitors to take advantage of the discount offer. competitors to take advantage of the discount offer. You want to examine how this credit policy would affect the cash budget and the short-term financial plan if Ohio Cast introduces the credit policy at the beginning of the first quarter. You believe that 40 percent of all sales will take advantage of the new credit policy and DSO will decrease to 36 days.

1. Prepare the cash budget and short-term financial plan under the current company policies.

2. Re-work the cash budget and short-term financial plan to evaluate the effect of the decrease in the minimum cash balance.

3. Re-work the cash budget and short-term financial plan to evaluate the effect of the introduction of the new credit policy and the decrease in the minimum cash balance. What annual interest rate are you effectively offering customers who take the discount?

Cash budget and short-term financial plan templates:

A. Quarterly cash flow projections

Collections from previous quarter +Collections from current quarter sales -Payments to suppliers for previous quarter -Payments to suppliers for current quarter -Expenses -Dividends and interest -Outlay =Net cash flow

B. Quarterly cash balance projections

Beginning cash balance +Net cash inflow =Ending cash balance -Minimum cash balance =Cumulative surplus deficit

C. Short-term financial plan

Target cash balance Net cash inflow New short-term investments Income on short-term investments Short-term investments sold New short-term borrowing Interest on short-term borrowing Short-term borrowing repaid =Ending cash balance -Minimum cash balance =Cumulative surplus deficit