KEAFER MANUFACTURING WORKING CAPITAL MANAGEMENT You have recently been hired by Keafer Manufacturing to work in its newly established treasury department. Keafer Manufacturing is a small company that produces highly customized cardboard boxes in a variety of sizes for different purchasers. Adam Keafer, the owner of the company, works primarily in the sales and production areas of the company. Currently, the company basically puts all receivables in one pile and all payables in another, and a part-time bookkeeper periodically comes in and attacks the piles. Because of this disorganized system, the finance area needs work, and that's what you've been brought in to do. The company currently has a cash balance of $210,000, and it plans to purchase new machinery in the third quarter at a cost of $390,000. The purchase of the machinery will be made with cash because of the discount offered for a cash purchase. Adam wants to maintain a minimum cash balance of $135,000 to guard against unforeseen contingencies. All of Keafer's sales to customers and purchases from suppliers are made with credit, and no discounts are offered or taken.

The company had the following sales each quarter of the year just ended:

Q1 Q2 Q3 Q4

Gross sales $1102,000 $1141,000 $1125,000 $1063,000

After some research and discussions with customers, you're projecting that sales will be 8 percent higher in each quarter next year. Sales for first quarter of the following year are also expected to grow at 8 percent. You calculate that Keafer currently has an accounts receivable period of 57 days and an accounts receivable balance of $675,000. However, 10 percent of the accounts receivable balance corresponds to a company that just went bankrupt, and that portion of the bills will likely never be collected.

He also calculated that Keafer typically orders supplies each quarter in an amount equal to 50 percent. percent of projected gross sales for the following quarter, and that suppliers are paid in 53 days, in average. Salaries, taxes and other costs represent about 23 percent of gross sales. The The company has to make a quarterly interest payment of $185,000 on its long-term debt. Lastly, the The company turns to a local bank to cover its short-term financial needs. Currently pays 1.2 per cent per quarter on all its short-term debts and maintains a money market account that pays .5 percent per quarter on all short-term deposits.

Adam asked him to prepare a cash budget and short-term financial plan for the company considering the

current policies. He also asked her to make additional plans based on certain changes in various aspects.

1. Use the figures presented to complete the cash budget and a short-term financial plan.

2. Redraw the cash budget and short-term financial plan, assuming Keafer changes to a $90,000 minimum cash balance.

3. Rework the sales budget assuming a sales growth rate of 11 and 5 percent. Assume that the target cash balance is $135,000.

4. Assuming the company maintains a target cash balance of $135,000, what is the sales growth rate would result in 0 percent short-term financing needs? To answer the question, you may need to create a spreadsheet and use the Solver function.