Case Questions

You have been asked to assess SPV's preparedness for a disaster. In addition to the information provided in the case, SPV management has also provided you with the following expectations for August through October based on bookings and expected operations.

SPV management expects to have 145 rentals during July and a cash balance of US$253,100 on August 5, after receiving amounts due from the owners but before any August payments are made.

Question 1: Cash Availability Using Excel, prepare a cash budget for August, September, and October to assess whether or not SPV has ample cash to respond to a disaster in any of those three months. Summarize your findings. Make specific recommendations, if needed.

Boldt, Margaret N. Volume 13, Sea Pines Villa: Are They Ready For The Big One?

https://www.imanet.org/educators/ima-educational-case-journal/iecj-index/2020/iecj-issue-page?ssopc=1

		July	August	September	October	November
Expected rentals		145	152	148	96	61
Expected rental amounts			$ 205,000	$ 183,000	$ 147,000	$ 67,000
Expected resort fees			10,485	9,590	7,420	5,630
Expected reservation fees			17,550	16,040	12,080	9,950
Expected purchases and contractor payments on behalf of owners			26,500	25,100	23,700	24,130
Cash Balance Before Receipts				$ 253,100	$ 253,100	$ 253,100
Receipts:
Resort Fees
Reservation Fees
Finders Fees	20.00%
Key Keeping Fees
Reimbursement from Purchases and Contractor Payments on Behalf of Owners
Miscellaneous
Total Receipts on the 5th of the month				$ -	$ -
Cash Balance after Receipts			$ 253,100	$ 253,100	$ 253,100
Payments:
Villa Cleaning Service	$90
Supplies and Welcome Packages	$10
Resort Gate Passes	$30
Health Club and Gym Passes
Financial Processing Fees	2.25%
Purchases and Contractor Payments on Behalf of Owner
SPV Administration and Overhead
Total Payments			$ -	$ -	$ -
Cash Balance after Payments			$ 253,100	$ 253,100	$ 253,100
Desired Cash Balance			176,000	176,000	176,000
Excess (Deficiency)			$ 77,100	$ 77,100	$ 77,100

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IMA Case EDUCATIONAL Case Journal Study ima The Association of Accountants and Financial Professionals in Business ISSN 1940-204X Sea Pines Villa: Are They Ready For The Big One? Margaret .. Boldt, Ph.D., CMA Department of Accounting and Finance Southeastern Louisiana University INTRODUCTION Sca Pines Villa (SPV) manages and rents 42 vacation villas on a barrier island near South Carolina. The island is a celebrated higher-end tourist destination, and business has thrived. From April through October, SPV books rentals "boutique" style, with guests renting from three nights to three weeks. From mid-November through March, the bulk of rental activity is for monthly occupancies. For the last five years, SPV has enjoyed almost no vacancies except for scheduled deep cleanings, remodels, owner occupancies, and the like. VILLA RENTALS Guests can book villa rentals by calling SPV directly, using SPV's website, or by going through one of several travel reservation websites where SPV properties are listedi. Consistent with industry practice, SPV collects rental monies before the stay. While a small number of guests still prefer to write a check, most pay by credit card. Regardless of the method of payment, all of the money collected is immediately deposited into an escrow account and cannot be released by law) to either SPV or the villa owner until after the guest has departed. To ensure compliance with all the local and state regulations. SPV has had a longtime practice of releasing money from cscrow once a month. The rental money is held in escrow until the fifth of the month after the guest departs. For example, a rental for September 25 through October 3 is not released until November 5. While such a lengthy lag is very conservative, SPV is committed to maintaining this schedule. Other similar businesses have found themselves in disputes with owners and/or guests over the rental company taking early possession of money, premature distribution to owners, and other inappropriate disbursements of escrowed rental monies. SPV has a reputation for both honesty and transparency, and company management believes their success is due, at least in part, to their diligent separation of funds and ensuring all parties are satisfied before disbursement. SPV earns revenues from villa rentals via several different streams. First, guests pay resort fees that cwer gate passes to enter the resort. passes to health clubs and swimming pools, and other desirable guest amenities like bicycles and outdoor grills. The amount of the resort fee depends on what amenities the guest wants included with his or her stay and how many cars he or she would like to have while staying at the villa. Guests also pay a reservation foc. The amount of the reservation fee varies with the size of the villa (number of bedrooms and bathrooms). Resort ces, reservation fees, and state and local occupancy taxes are collected with the rental memies and deposited into the escrow account. None of the money is received by SPV until the monthly release following the guest's departure. SPV also carns finders lees equal to 20% of cach rental amount (before tax. resort fees, and reservation fees). The amount of the finders fees depends on the rental amount, which varies with the size and location of the villa, the duration of the stay, and the time of vear of the stay. The owners are responsible for paying the finders fees, and SPV receives this money out of the owners' distributions when the rental monies are released from escrow. IMA EDUCATIONAL CASE JOURNAL VOL. 12, NO. 4, ART. 4, DECEMBER 2019 2019 IMA SPV has several different costs associated with villa rentals. Prior to each guest arrival, the villa is professionally cleaned and restocked with fresh linens. The cleaning company invoices on the date of service and is paid on the same day. Before each rental, the villa is also restocked with various consumable items like facial tissues, paper toweling, coffee filters, trash bags, and the like. Upon arrival, cach guest also finds a "welcome package in the main living area containing samples of local femds and beverages, pass information for pools, directions to the beach, rules about interacting with wildlife, and information about the island. resort, and the specilic villa he or she is renting. The supplies for the villas and welcome packages are generally purchased as needed throughout each month. SPV also provides a resort gate pass for cach guest vehicle. The resort invoices for the gate passes once a month for the gate passes ordered the previous month. SPV also pays one monthly flat fee for all its guests to have access to a health club and gym. Finally, SPV pays various financial fees for credit card processing, internet payment processing, and payment processing through the various travel websites. All of these fees are due once a month and are based on the amount of payments processed. Generally, guests pay a deposit when they make the initial reservation and then pay the remainder of the rental sometime during the month preceding their stay. Hence, financial fees payments are highly correlated with the following month's total rental receipts (rental amounts plus resort fees and reservation fees). to their success in an otherwise uncertain industry. SPV has developed a network of providers for services, including cleaning, landscaping, plumbing, HVAC repair, appliance repair, and so on. These quality providers respond quickly to SPV because the providers will be paid at the time of service. Management believes the benefits of happy providers and owners, with complete transparency, far outweigh any incremental revenite received from charging an additional fee. Indeed, SPV has a waiting list of owners wanting them to manage their properties, and guests book up to 18 months in advance to stay in one of its managed properties. Moncy in escrow cannot be used to make contractor payments or purchases on behalf of owners. Thus, SPV makes all these payinents out of its checking account. When rental monics are released, SPV is paid amounts due to SPV with the remainder distributed to the owner. Occasionally, usually in the winter months. an owner mayowe SPV after monies are released. Historically, SPV has allowed owners to defer payment until a later month when there are excess rental monies. Allowing deferment has never been an issue. because SPV has always had ample cash. OTHER REVENUES SPV receives small amounts of revenue from a few other sources as well. It earns a small amount of interest each month on the funds in its checking account, though it is prohibited from receiving interest income on the funds in escrow. SPV also retains a small fee when a guest cancels (unless the cancellation occurs within a few business days). The state provides a small discount when guests use an online payment portal and pay all of the occupancy tax due for the preceding month by the 15th of the month following departure. PROPERTY MANAGEMENT OVERHEAD AND ADMINISTRATION Each villa's owner pays SPV a small fat fee each month for "key keeping" services. Key keeping includes meeting contractors and local service providers at the villa, addressing guest complaints and issues. putting out the owner's personal items Before they arrive and locking them up after the owner leaves, preparing the property for storms, and other miscellaneous services. The key keeping fee is paid out of owner disbursements when rental monics are released from scrow. SPV contracts with independent contractors and local businesses for deep cleaning, maintenance, and repairs. The company also shop for and purchases replacement furniture, linens, appliances, and decorator items on behalf of the owners. SPV provides a copy of cach invoice to the owner and is reimbursed when rental monics are released from escrow on the fifth of the next month. SPV does not charge the owners or the contractors for this service. SPV management believes that this arrangement has been a key SPV also has several administrative costs that are essentially fixed with respect to rentals and number of units (unless the company was to expand considerably). These monthly payments include salaries and employment taxes for four employees, ante expenses, computing and internet service, soffice supplies, business licenses, telephone, postage, and insurance. The accompanying Table summarizes SPV's receipts and payments. IMA EDUCATIONAL CASE JOURNAL VOL. 12, NO. 4, ART. 4. DECEMBER 2019 WHAT IF? units if they receive some memes up front to cwer the cost of contractor supplies and labor. After consultation with three of its most used contractors, SPV estimates that having US$3,000 per unit (US$126,(X) total) in cash woukite sufficient to begin immediate repairs. In addition, SPV believes that US$50,000 would be ample to provide for payroll and other continuing costs and sustain the business. SPV management has become increasingly concerned over how they would handle a major disaster. Their location is susceptible to hurricanes, and they want to be prepared. Their policy states that guests can receive a refund or apply their rental to a future date if the island closes for any reason. Furthermore, they are not only concerned about losing the fecs from lost rentals during a closure, but also about their ability to pay for repairs on behalf of the owners to make villas rentable. A recent survey of villa owners indicated that 13 of the 42 villas do not carry insurance that would cover hurricane damage. In addition, scate and federal agencies do not provide rclict for these properties because they are not primary residences. Thus, it would fall to SPV to pay the bills up front and collect from the owners and/or be reimbursed out of future rentals. Of course, not all units would sustain major damage. SPV also has a high-limir business credit card that can be used tar pray for the vast majority of upfront costs. Local contractors, however, are more likely to prioritize work on damaged SPV ABOUT IMA (INSTITUTE OF MANAGEMENT ACCOUNTANTS) IMA, the association of accountants and financial professionals in business, is one of the largest and most respected associations focused exclusively on advancing the management accounting profession, Globally. IMA supports the profession through research, the CMA (Certified Management Accountant) program, continuing education, thetworking and advocacy of the highest ethical business practices. IMA has a global network of more than 100.000 members in 140 countries and 300 professional and student chapters. Ileadquartered in Montvale, NJ., USA, IMA provides localized services through its four global regions: The Americas, Asia Pacific, Europe, and Middle East India. For more information about IMA please visit www.imanet.org 1 Table 1. Summary of Receipts and Payments for Sea Pines Villa Receipts (all receipts occur on the 5th of the month) Resor Fras Amauris vary with armeinsprwided Reservation Fees Amounts vary based on the size of the villa rented Finders Foos 20% of the rental amounts (excluding resort fees reservation foes, and taxes Reimbursement from Purchases and Contractor Payments on behalf of Owners Armounts vary based on payments made to contractors during the preceding month Miscellaneous Amounts vary but average about $150 per month Payments Averages $90 per rental Villa Cleaning Service Supplies and Welcome Packages Resort Gate Passes Averaghs $10 perten Health Club and Gym Passes Financial Processing Fees Averages $30 per rental, paid the month following the rental $600 per month Averages 2.25% of the following month's total rental receipts (rental amount resort fees + reservation fees Varics with the month and the desires of the owners $21,900 per month Purchases and Contractors on Bchalf of Owners SPV Administration and Overhead Note: All manctary values are represented in US dollars. IMA EDUCATIONAL CASE JOURNAL 3 VOL. 12, NO. 4, ART, 4, DECEMBER 2019 IMA Case EDUCATIONAL Case Journal Study ima The Association of Accountants and Financial Professionals in Business ISSN 1940-204X Sea Pines Villa: Are They Ready For The Big One? Margaret .. Boldt, Ph.D., CMA Department of Accounting and Finance Southeastern Louisiana University INTRODUCTION Sca Pines Villa (SPV) manages and rents 42 vacation villas on a barrier island near South Carolina. The island is a celebrated higher-end tourist destination, and business has thrived. From April through October, SPV books rentals "boutique" style, with guests renting from three nights to three weeks. From mid-November through March, the bulk of rental activity is for monthly occupancies. For the last five years, SPV has enjoyed almost no vacancies except for scheduled deep cleanings, remodels, owner occupancies, and the like. VILLA RENTALS Guests can book villa rentals by calling SPV directly, using SPV's website, or by going through one of several travel reservation websites where SPV properties are listedi. Consistent with industry practice, SPV collects rental monies before the stay. While a small number of guests still prefer to write a check, most pay by credit card. Regardless of the method of payment, all of the money collected is immediately deposited into an escrow account and cannot be released by law) to either SPV or the villa owner until after the guest has departed. To ensure compliance with all the local and state regulations. SPV has had a longtime practice of releasing money from cscrow once a month. The rental money is held in escrow until the fifth of the month after the guest departs. For example, a rental for September 25 through October 3 is not released until November 5. While such a lengthy lag is very conservative, SPV is committed to maintaining this schedule. Other similar businesses have found themselves in disputes with owners and/or guests over the rental company taking early possession of money, premature distribution to owners, and other inappropriate disbursements of escrowed rental monies. SPV has a reputation for both honesty and transparency, and company management believes their success is due, at least in part, to their diligent separation of funds and ensuring all parties are satisfied before disbursement. SPV earns revenues from villa rentals via several different streams. First, guests pay resort fees that cwer gate passes to enter the resort. passes to health clubs and swimming pools, and other desirable guest amenities like bicycles and outdoor grills. The amount of the resort fee depends on what amenities the guest wants included with his or her stay and how many cars he or she would like to have while staying at the villa. Guests also pay a reservation foc. The amount of the reservation fee varies with the size of the villa (number of bedrooms and bathrooms). Resort ces, reservation fees, and state and local occupancy taxes are collected with the rental memies and deposited into the escrow account. None of the money is received by SPV until the monthly release following the guest's departure. SPV also carns finders lees equal to 20% of cach rental amount (before tax. resort fees, and reservation fees). The amount of the finders fees depends on the rental amount, which varies with the size and location of the villa, the duration of the stay, and the time of vear of the stay. The owners are responsible for paying the finders fees, and SPV receives this money out of the owners' distributions when the rental monies are released from escrow. IMA EDUCATIONAL CASE JOURNAL VOL. 12, NO. 4, ART. 4, DECEMBER 2019 2019 IMA SPV has several different costs associated with villa rentals. Prior to each guest arrival, the villa is professionally cleaned and restocked with fresh linens. The cleaning company invoices on the date of service and is paid on the same day. Before each rental, the villa is also restocked with various consumable items like facial tissues, paper toweling, coffee filters, trash bags, and the like. Upon arrival, cach guest also finds a "welcome package in the main living area containing samples of local femds and beverages, pass information for pools, directions to the beach, rules about interacting with wildlife, and information about the island. resort, and the specilic villa he or she is renting. The supplies for the villas and welcome packages are generally purchased as needed throughout each month. SPV also provides a resort gate pass for cach guest vehicle. The resort invoices for the gate passes once a month for the gate passes ordered the previous month. SPV also pays one monthly flat fee for all its guests to have access to a health club and gym. Finally, SPV pays various financial fees for credit card processing, internet payment processing, and payment processing through the various travel websites. All of these fees are due once a month and are based on the amount of payments processed. Generally, guests pay a deposit when they make the initial reservation and then pay the remainder of the rental sometime during the month preceding their stay. Hence, financial fees payments are highly correlated with the following month's total rental receipts (rental amounts plus resort fees and reservation fees). to their success in an otherwise uncertain industry. SPV has developed a network of providers for services, including cleaning, landscaping, plumbing, HVAC repair, appliance repair, and so on. These quality providers respond quickly to SPV because the providers will be paid at the time of service. Management believes the benefits of happy providers and owners, with complete transparency, far outweigh any incremental revenite received from charging an additional fee. Indeed, SPV has a waiting list of owners wanting them to manage their properties, and guests book up to 18 months in advance to stay in one of its managed properties. Moncy in escrow cannot be used to make contractor payments or purchases on behalf of owners. Thus, SPV makes all these payinents out of its checking account. When rental monics are released, SPV is paid amounts due to SPV with the remainder distributed to the owner. Occasionally, usually in the winter months. an owner mayowe SPV after monies are released. Historically, SPV has allowed owners to defer payment until a later month when there are excess rental monies. Allowing deferment has never been an issue. because SPV has always had ample cash. OTHER REVENUES SPV receives small amounts of revenue from a few other sources as well. It earns a small amount of interest each month on the funds in its checking account, though it is prohibited from receiving interest income on the funds in escrow. SPV also retains a small fee when a guest cancels (unless the cancellation occurs within a few business days). The state provides a small discount when guests use an online payment portal and pay all of the occupancy tax due for the preceding month by the 15th of the month following departure. PROPERTY MANAGEMENT OVERHEAD AND ADMINISTRATION Each villa's owner pays SPV a small fat fee each month for "key keeping" services. Key keeping includes meeting contractors and local service providers at the villa, addressing guest complaints and issues. putting out the owner's personal items Before they arrive and locking them up after the owner leaves, preparing the property for storms, and other miscellaneous services. The key keeping fee is paid out of owner disbursements when rental monics are released from scrow. SPV contracts with independent contractors and local businesses for deep cleaning, maintenance, and repairs. The company also shop for and purchases replacement furniture, linens, appliances, and decorator items on behalf of the owners. SPV provides a copy of cach invoice to the owner and is reimbursed when rental monics are released from escrow on the fifth of the next month. SPV does not charge the owners or the contractors for this service. SPV management believes that this arrangement has been a key SPV also has several administrative costs that are essentially fixed with respect to rentals and number of units (unless the company was to expand considerably). These monthly payments include salaries and employment taxes for four employees, ante expenses, computing and internet service, soffice supplies, business licenses, telephone, postage, and insurance. The accompanying Table summarizes SPV's receipts and payments. IMA EDUCATIONAL CASE JOURNAL VOL. 12, NO. 4, ART. 4. DECEMBER 2019 WHAT IF? units if they receive some memes up front to cwer the cost of contractor supplies and labor. After consultation with three of its most used contractors, SPV estimates that having US$3,000 per unit (US$126,(X) total) in cash woukite sufficient to begin immediate repairs. In addition, SPV believes that US$50,000 would be ample to provide for payroll and other continuing costs and sustain the business. SPV management has become increasingly concerned over how they would handle a major disaster. Their location is susceptible to hurricanes, and they want to be prepared. Their policy states that guests can receive a refund or apply their rental to a future date if the island closes for any reason. Furthermore, they are not only concerned about losing the fecs from lost rentals during a closure, but also about their ability to pay for repairs on behalf of the owners to make villas rentable. A recent survey of villa owners indicated that 13 of the 42 villas do not carry insurance that would cover hurricane damage. In addition, scate and federal agencies do not provide rclict for these properties because they are not primary residences. Thus, it would fall to SPV to pay the bills up front and collect from the owners and/or be reimbursed out of future rentals. Of course, not all units would sustain major damage. SPV also has a high-limir business credit card that can be used tar pray for the vast majority of upfront costs. Local contractors, however, are more likely to prioritize work on damaged SPV ABOUT IMA (INSTITUTE OF MANAGEMENT ACCOUNTANTS) IMA, the association of accountants and financial professionals in business, is one of the largest and most respected associations focused exclusively on advancing the management accounting profession, Globally. IMA supports the profession through research, the CMA (Certified Management Accountant) program, continuing education, thetworking and advocacy of the highest ethical business practices. IMA has a global network of more than 100.000 members in 140 countries and 300 professional and student chapters. Ileadquartered in Montvale, NJ., USA, IMA provides localized services through its four global regions: The Americas, Asia Pacific, Europe, and Middle East India. For more information about IMA please visit www.imanet.org 1 Table 1. Summary of Receipts and Payments for Sea Pines Villa Receipts (all receipts occur on the 5th of the month) Resor Fras Amauris vary with armeinsprwided Reservation Fees Amounts vary based on the size of the villa rented Finders Foos 20% of the rental amounts (excluding resort fees reservation foes, and taxes Reimbursement from Purchases and Contractor Payments on behalf of Owners Armounts vary based on payments made to contractors during the preceding month Miscellaneous Amounts vary but average about $150 per month Payments Averages $90 per rental Villa Cleaning Service Supplies and Welcome Packages Resort Gate Passes Averaghs $10 perten Health Club and Gym Passes Financial Processing Fees Averages $30 per rental, paid the month following the rental $600 per month Averages 2.25% of the following month's total rental receipts (rental amount resort fees + reservation fees Varics with the month and the desires of the owners $21,900 per month Purchases and Contractors on Bchalf of Owners SPV Administration and Overhead Note: All manctary values are represented in US dollars. IMA EDUCATIONAL CASE JOURNAL 3 VOL. 12, NO. 4, ART, 4, DECEMBER 2019