Cash Management Ms. Amanda Truly is the new CFO of Mind and Body, Inc., which produces popular yoga and Pilates videos. Ms. Truly is concerned about the companys cash flow management, and would like to get a better "feel" for the way cash flows are managed at Mind and Body, Inc. The CEO of the company, Mr. Lawrence Jackson, is worried about the companys cash situation. Although the company has consistently produced positive net income, the level of its short-term borrowing is worrisome. Mr. Jackson would like Ms. Truly to construct a cash budget for next year so that they can devise a short-term financial policy that would effectively suit the companys cash flows. To this end, Mr. Jackson has provided Ms. Truly with the companys most recent Statement of Comprehensive Income, Statement of Financial Position, and Cash Budget, and the following disparate information: Purchases from suppliers = 70% of predicted sales for the next month Accounts payable period = 30 days Wages and other expenses = 20% of predicted sales Capital expenditures (computer system purchase) in June = $500,000 Long-term debt interest expense = $50,000 Dividends = $30,000 per quarter Minimum cash balance = $200,000 Short-term cost of borrowing = 13% APR, compounded monthly Long-term cost of borrowing = 10% APR, compounded monthly Income taxes from last years income will be paid monthly in this year Interest expense on accumulated short-term expense must be paid in the following month Customer payments: 50% in the month of sales, 30% pay in the month after sales, and 20% two months after sales Bad debt = ~ 2% if customers have not made payment after 60 days Table 1: Last Year's Statement of Comprehensive Income Sales $10,944,250 Cost of goods sold 7,660,975 Wages and other expenses 2,188,850 Earnings before depreciation, interest, and taxes 1,094,425 Depreciation 100,000 Earnings before interest and taxes 994,425 Interest expense 603,760 Taxable income 390,665 Taxes 140,640 Net income 250,025 Dividends 120,000 Additions to retained earnings 130,025 Table 2: Last Year's Statement of Financial Position Cash $200,000 Accounts payable 140,000 Inventory 140,000 Notes payable 41,520 Accounts receivable 792,080 Current liabilities 181,520 Current assets 1,132,080 Long-term debt 6,000,000 Common stock 2,500,000 Net fixed assets 9,004,814 Retained earnings 1,455,374 Total owners' equity 3,955,374 Total assets 10,136,894 Total liabilities & owners' equity 10,136,894 Table 3: Cash Budget Cash collections: January February March April May June Sales 185,000 370,000 740,000 2,035,000 203,500 407,000 Month 0 collections 92,500 185,000 370,000 1,017,500 101,750 203,500 Month -1 collections 540,000 55,500 111,000 222,000 610,500 61,050 Month -2 collections 172,872 352,800 36,260 72,520 145,040 398,860 Total collections 805,372 593,300 517,260 1,312,020 857,290 663,410 Beginning accounts receivable 1,076,400 452,500 222,000 444,000 1,165,500 508,750 Sales 185,000 370,000 740,000 2,035,000 203,500 407,000 Cash collections 805,372 593,300 517,260 1,312,020 857,290 663,410 Ending accounts receivable 452,500 222,000 444,000 1,165,500 508,750 244,200 Cash disbursements: January February March April May June Beginning accounts payable 129,500 259,000 518,000 1,424,500 142,450 284,900 Purchases 259,000 518,000 1,424,500 142,450 284,900 466,200 Payment of accounts Payable 129,500 259,000 518,000 1,424,500 142,450 284,900 Ending accounts payable 259,000 518,000 1,424,500 142,450 284,900 466,200 Payment of accounts payable 129,500 259,000 518,000 1,424,500 142,450 284,900 Wages and other expenses 37,000 74,000 148,000 407,000 40,700 81,400 Taxes 20,833 20,833 20,833 20,833 20,833 20,833 Capital expense 0 0 0 0 0 0 ST interest expense 400 0 0 0 897 0 LT interest expense 50,000 50,000 50,000 50,000 50,000 50,000 Dividends 0 0 30,000 0 0 30,000 Cash disbursements 237,733 403,833 766,833 1,902,333 254,880 467,133 Cash collections 805,372 593,300 517,260 1,312,020 857,290 663,410 Cash disbursements 237,733 403,833 766,833 1,902,333 254,880 467,133 Net cash inflow 567,639 189,467 249,573 590,313 602,410 196,277 Cash Budget: January February March April May June Beginning cash balance 200,000 767,639 957,105 707,532 200,000 719,629 Net cash inflow 567,639 189,467 249,573 590,313 602,410 196,277 Ending cash balance 767,639 957,105 707,532 117,219 802,410 915,905 Minimum cash balance 200,000 200,000 200,000 200,000 200,000 200,000 Surplus/deficit 567,639 757,105 507,532 82,781 602,410 715,905 Short-term borrowing 0 0 0 82,781 0 0 Repayment of ST debt 0 0 0 0 82,781 0 Cumulative ST debt 0 0 0 82,781 0 0 ST interest expense 0 0 0 897 0 0 Table 3: Cash Budget (Cont.) Cash collections: July August September October November December Sales 666,000 2,442,000 305,250 610,500 980,000 2,000,000 Month 0 collections 333,000 1,221,000 152,625 305,250 490,000 1,000,000 Month -1 collections 122,100 199,800 732,600 91,575 183,150 294,000 Month -2 collections 39,886 79,772 130,536 478,632 59,829 119,658 Total collections 494,986 1,500,572 1,015,761 875,457 732,979 1,413,658 Beginning accounts receivable 244,200 414,400 1,354,200 641,025 366,300 612,100 Sales 666,000 2,442,000 305,250 610,500 980,000 2,000,000 Cash collections 494,986 1,500,572 1,015,761 875,457 732,979 1,413,658 Ending accounts receivable 414,400 1,354,200 641,025 366,300 612,100 1,196,000 Cash disbursements: July August September October November December Beginning accounts payable 466,200 1,709,400 213,675 427,350 686,000 1,400,000 Purchases 1,709,400 213,675 427,350 686,000 1,400,000 140,000 Payment of accounts payable 466,200 1,709,400 213,675 427,350 686,000 1,400,000 Ending accounts payable 1,709,400 213,675 427,350 686,000 1,400,000 140,000 Payment of accounts payable 466,200 1,709,400 213,675 427,350 686,000 1,400,000 Wages and other expenses 133,200 488,400 61,050 122,100 196,000 400,000 Taxes 20,833 20,833 20,833 20,833 20,833 20,833 Capital expense 0 0 0 0 0 0 ST interest expense 0 0 2,464 0 0 0 LT interest expense 50,000 50,000 50,000 50,000 50,000 50,000 Dividends 0 0 30,000 0 0 30,000 Cash disbursements 670,233 2,268,633 378,022 620,283 952,833 1,900,833 Cash collections 494,986 1,500,572 1,015,761 875,457 732,979 1,413,658 Cash disbursements 670,233 2,268,633 378,022 620,283 952,833 1,900,833 Net cash inflow 175,247 768,061 637,739 255,174 219,854 487,175 Cash budget: January February March April May June Beginning cash balance 915,905 740,658 200,000 610,336 865,509 645,655 Net cash inflow 175,247 768,061 637,739 255,174 219,854 487,175 Ending cash balance 740,658 27,403 837,739 865,509 645,655 158,480 Minimum cash balance 200,000 200,000 200,000 200,000 200,000 200,000 Surplus/deficit 540,658 227,403 637,739 665,509 445,655 41,520 Short-term borrowing 0 227,403 0 0 0 41,520 Repayment of ST debt 0 0 227,403 0 0 0 Cumulative ST debt 0 227,403 0 0 0 41,520 ST interest expense 0 2,464 0 0 0 450 Table 4: Sales Forecasts for next 13 months January 200,000 February 400,000 March 800,000 April 2,200,000 May 220,000 June 440,000 July 720,000 August 2,640,000 September 330,000 October 660,000 November 1,080,000 December 3,960,000 January 220,000 Mr. Jackson asks Ms. Truly to produce a report on the current state of the companys cash flows and short-term financing needs for a meeting next week. Ms. Truly wrote down the following tasks that must be completed prior to writing her report: Construct the monthly cash collections table. Construct the monthly cash disbursements table. Calculate the monthly net cash inflow. Construct the monthly cash budget. In the report, Ms. Truly plans to include the cash budget as well as answers to the following questions (just sent in by Mr. Jackson): 1. What will be the predicted monthly cash deficits and surpluses, and how much short-term financing will the company need in the coming year? What can be inferred from the pattern of cash deficits and surpluses, and the pattern of requirements for short-term financing? 2. Why is depreciation expense (a large amount) not included in the cash budget? 3. Evaluate the companys minimum cash reserve policy. What would happen to the cash budget if we changed the minimum cash reserve to $0? To $5,000? To $50,000? To $500,000? Should the company stick with its $200,000 minimum cash balance? 4. The Bank of Scotia is offering to invest the companys surplus cash at 6% APR compounded semi-annually for a fee of $2,000 per year, payable at the end of the year. Earnings on the investment will be calculated and deposited at the end of each month. Should the company invest with the bank? 5. The sales estimates were provided by the sales department. Can we trust these figures? What can be done to overcome the forecasting risk