need a cash balance

GREAT ENDEAVOR SPORTING GOODS Great Endeavor Sporting Goods (Revised Sept. 20, 2010) Garland Simmons GREAT ENDEA VOR SPORTING GOODS is a family owned business. The owner, Mr. Sam Cage, is seventy years old and wishes to retire at the end of the ycar, December 31, 2004. Sam, his wife Mary, and their four grown children, their spouses, and all of the grandchildren are very close. The oldest son, John, continues to work alongside his father as he has done since elementary school. John Cage has been approached by his dad and asked to consider taking over the business. Sam Cage is willing to finance the sale of the business to his son John. Other family members are supportive, and there is no reason to believe that any will be disappointed that John will be given the opportunity to continue in the business, even though he may (or may not) enjoy a transfer of wealth from his parents that other siblings will not participate in. The details have yet to be worked out, but there is general agreement that this deal can and should be accomplished by the end of the year, 2004. John' s wife, Jane, does the accounting for the business. (She also manages her own very successful CPA firm.) Sam and John Cage both look to her for direction on how to structure the sale of the business. Jane Cage begins to collect and organize information relevant to the creation ofa cash budget to see if the business can generate enough cash flow to pay Sam Cage's asking price. The sales numbers reported in Exhibit 2 do not include the collection of sales taxes. An eight percent sales tax is collected on all sales. These taxes are remitted to state government in the month following collection. Credit card companies charge a percentage of sales when their card is used. These fees are collected immediately via electronic funds transfer. For planning purposes it is estimated that credit card fees average three percent of all sales and that the sales tax is collected from all customers, thus credit card fees are calculated as equal to three percent of 108 percent of all sales. Ihere are cash outflows associated with salary and wages. These are considered as a omponent of fixed costs. John' s brother and his sisters and their spouses occasionally work in the store as they are needed to fill in for those on vacation. College students also work in this business It is estimated that gross monthly payroll for all employees, both occasional and regular, will average $20,000 per month next ycar. Payday is the last business day of every month. Many of these working arrangements are expected to continue after Sam Cage retires, and it is not anticipated that the size and timing of payrolls will change as a result of retirement. In addition to labor costs there are rental costs. GREATENDEAVOR is currently located in a first class shopping center near residential areas and a large shopping mall. Rent is due the last business day of every month. The previous rental contract called for monthly payments equal to $900 per month. However, this contract expired in October of 2004. GREAT ENDEAVOR currently pays monthly an amount equal to the maximum of either S1,000 or two percent of the previous month' s sales. The rent is paid the last day of every month The business has changed locations several times in the last fifteen years. Each time the trouble and expense of moving has been significant. Also, as far as anyone can tell, moving in the past has never served to increase sales revenue. In any event, the rental agreement currently in-force will be binding until the end of 2006 Beyond the rent and the payroll expenses previously mentioned, there are other fixed costs: $2,000 per month advertising, about $1400 per month for utilities, and $600 for insurance. These costs are paid for as they are incurred. Also, there is depreciation expense associated with the investment in the silkscreen machine, a device that is used in lettering and decorating team jerseys caps, and shirts, and depreciation expense is also taken on computer equipment used in orderin l'otal depreciation expense per month is equal to $100. There are also income taxes. GREAT ENDEAVOR is incorporated, paying a corporate tax rate estimated by Jane Cage for planning purposes to equal thirty-five percent. (This is more than likely an over estimate.) Estimated income taxes are paid at the end of every quarter, the first quarter paid on March 31 and so forth 0 rican middle-class parents of school-age children who live in or near the small town where GREAT ENDEAVOR is located. They are price sensitive, but their needs are often fixed by the requirements of athletic teams to which their children belong. Participation in athletic leagues by ren is important to many families of this town. Approximately sixty-five percent of customers whose purchases are related to team sports are women shopping for their son/ daughter' s sporting clothes and equipment. Most customers shopping for their children use or can choose to use credit cards to make purchases, and most can be contacted by e-mail and cell phone after a sale is made to modify their initial purchase decisions. Service after the sale is very important to this group: often Describing Customers There are three kinds of customers served by GREAT ENDEAVOR. The largest number a Amer ods are to be returned and exchanged with these customers. se, most are A significant number of customers are not shopping for their children. Of the men in their thirties or forties. Customers in this group typically hunt quail and ducks fly-fisherman; or they play softball and/ or baskethall in an organized league. They very much rely upon sales personnel for advice as they choose equipment. Much of the equipment which they eventually purchase is quitc expensive. So, it is not unusual for these customers to make repeated visits before a sale is made. Customers of this group typically make large purchases of $200 and up They are not as price sensitive as team-sports customers, but they will refuse to pay more than what they would at a discounter for commonly available items. For customers in this category, the holiday season is an important shopping time. customers use or can choose to use mail and cell phone after a sale is made to modify their initial purchase decisions. Often be returned and exchanged with these customers. As is the case with team-sports customers, most of these credit cards to make purchases, and most can be contacted by e- A third group of customers are adults who want to stay physically fit. These neont people have buy running shoes, tennis shoes, and tennis and racquet-ball uipment from high-volume discount retailers when they first equipment of the customers use or can by e-mail and cell phone exerciscd for many y equipment. Having once bought eq started exercising, they now buy from GREATENDEAVOR where they find onl very highest quality. They are not price sensilive. About one-half of customers category are women. As is the case with team-sports customers, most ofthese choose to use credit cards to make purchases, and most can be contacted after a sale is made to modify their initial purchase decisions. lowever exchange or other kinds of service after sale is very unusual for customers of th cars. They who fit in th , requests or product egory Describing Cash flows Eighty percent of the business is retail, and twenty percent is with private schools. Retail customers pay at the time of sale with cash, check, or credit card. Most choose to use their credit card. Private schools also pay with a credit card, but this payment occurs one month after the sale. For both their retail and private school customers, there is no mcasurable bad debt experience to contend with both the private schools and the vast majority of retail customers have done business with GREAT ENDEAVOR for many years. A Sales History and a Forecast for 2005 are given in the exhibits below. The Cage family, and Jane Cage in particular, feel that these sales forecast numbers are very reliable. The business which serves these three kinds of customers is reasonably simple to understand. Exhibit 1. Great Endeavor Sporting Goods Monthly Sales Forecast S 120,000 July August September October $ 120,000 January 120,000 120,000 February 150,000 180,000 March 150,000 200,000 April May 150,000 November 180,000 120,000 June December 200,000 January 2006 120,000 Exhibit 2. Great Endeavor Sporting Goods Monthly Sales in 2004. January February 121,000 S 118,000 July 120,000 119,000 August 179,000 March 149.000 September April May June 199,000 October 151,000 150,000 November 180,000 122,000 December 200,000 are sh position is closely tied to inventory management. Inventory balances at carefully monitored by both Sam and John Cage. Current month ending inventory average eig percent of the next month's estimated Cost of Goods Sold. And cost of goods sold aver hty ag seventy-two percent of sales. Inventory and supplies are ordered from various vendors. At the end of every month purchases made in the previous month from these vendors are paid for in full. There is almost no theft loss associated with inventory. Employees, often a theft problem in a large business setting, are either trustworthy family members or honest college students that are well managed. College students come and go, but most work three or more years while they are in college, and many maintain friendly ties with the Cage family after they graduate. Customers are often friends of long standing. Shopping at GREAT ENDEAVOR is a family tradition for many The children of some customers can remember their parents buying them sports equipment from the Cage's years ago. Theft is no problem The management of cash balances is an important matter to Sam Cage. Years ago Sam Cage instituted a rule to hold a minimum cash balance equal to ten percent of next month' s estimated sales. In this regard, any cash balances over and above this target are used to repay any outstanding bank borrowing and, if this is fully accomplished, then excess funds are invested in a money market mutual fund. Currently this fund pays one-quarter of one percent a month. The current effective rate for this fund is equal to 3.04 percent. At year-end 2004 the investment in this money market mutual fund will equal zero a local bank. This bank has agreed to continue this practice after John Cage retires, perhaps because Sam Cage is willing to remain responsible for paying off any business debt owed the bank and because he is also willing to provide whatever collateral the bank requires. Borrowing is done at ed to provide loans of up to $50,000, charging one-half of one percent per month The bank has agre on the previous month' s bo 6.17 percent. At year-end 2004, Jane Cage projects that the balance owed the bank will be zero. rrowing. The effective annual interest rate for this source of financing i Describing the Competition The gross profit margin target for GREAT ENDEAVOR is only twenty-eight percent, low by industry standards. The Cages devote time to pricing decisions, pricing products available to retail customers at nearby discount centers as low as these discounters, so their customers need not worry about paying more than they should were they shopping at a discounter. GREAT ENDEAVOR deliberately chooses not to duplicate a sporting goods department of large discounters. The Cage family docs not sell swim wear, skating equipment, golfing equipment, bow-hunting gear, hunting and fishing licenses, most kinds of fishing gear, most kinds of football equipment, most finds of firearms, and they sell no ammunition whatsoever. GREATENDEAVOR sells merchandise connected with the sports of bascball, softball, basketball, soccer, fly fishing, duck hunting, tennis, racquetball and very little else. GREAT ENDEAVOR does things that no volume retailer can hope to emulate. The artistic ability of the owner' s family permits them to make team jerseys for the many local baseball, basketball, sofiball, soccer, and football teams; and to make flies for fly fisherman and decoys for duck hunters. These handmade wooden decoys could never be found at a volume retailer. They also re-string tennis and racquetball rackets, and rchabilitate old bamboo fly rods. Exhibit 3. Estimates of Tangible Asset Values as of Year-End 2004. S12,000 as 40,000 Accounts Reccivables 69,120 Inventory Silkscreen Equipment Computers, Telephones, Copier 5,000 10,000 Total $136,120 Analyzing Data Every year after Christmas-eve GREAT ENDEAVOR closes and does not reopen for business until the first business day after New Year's. It is a tradition that during this time members of the Cage's extended family travel to Sam and Mary Cage's vacation home in the Blue Ridge Mountains of North Carolina. This year during this family time together Jane Cage will assist both her father-in-law and her husband negotiate the transfer of ownership. The first question is about the value of the business. The total valuc of tangible assets as of year-end 2004 is estimated to be equal to $ 136,120. The only liability owed at ycar-end 2004 is an accounts payable of $ 97,920. All agree that the business is worth significantly more than the value of its net tangible assets of $ 38,200. Nevertheless, Sam Cage, knowing that John and Jane are currently putting their two children through college, cheerfully agrces to sell the business to his son John for only $40,000. This amount could be paid in equal quarterly installments of $10,000 each, the first payment scheduled for March 31 2005. Sam Cage also is willing to take less if Jane feels that the business could not afford to generate the cash flow to make such an agreement work. Both John and Jane would hate to sec Dad have to take less than $40,000. As the rest of the family leaves to go eat dinner at a local restaurant, Jane fires up her puter and pulls up her electronic spreadsheet package to get an answer to question number two. Will John Cage be able to take these quarterly payments out of the business without jeopardizing its survival? Create a cash budget for the twelve months of 2005. Assume in this cash budget that the quarterly payments to Sam Cage are made in a timely fashion. After you have made this ash budget, answer the question. Will John Cage be able to take these quarterly payments out of the business without jeopardizing its survival? GREAT ENDEAVOR SPORTING GOODS Great Endeavor Sporting Goods (Revised Sept. 20, 2010) Garland Simmons GREAT ENDEA VOR SPORTING GOODS is a family owned business. The owner, Mr. Sam Cage, is seventy years old and wishes to retire at the end of the ycar, December 31, 2004. Sam, his wife Mary, and their four grown children, their spouses, and all of the grandchildren are very close. The oldest son, John, continues to work alongside his father as he has done since elementary school. John Cage has been approached by his dad and asked to consider taking over the business. Sam Cage is willing to finance the sale of the business to his son John. Other family members are supportive, and there is no reason to believe that any will be disappointed that John will be given the opportunity to continue in the business, even though he may (or may not) enjoy a transfer of wealth from his parents that other siblings will not participate in. The details have yet to be worked out, but there is general agreement that this deal can and should be accomplished by the end of the year, 2004. John' s wife, Jane, does the accounting for the business. (She also manages her own very successful CPA firm.) Sam and John Cage both look to her for direction on how to structure the sale of the business. Jane Cage begins to collect and organize information relevant to the creation ofa cash budget to see if the business can generate enough cash flow to pay Sam Cage's asking price. The sales numbers reported in Exhibit 2 do not include the collection of sales taxes. An eight percent sales tax is collected on all sales. These taxes are remitted to state government in the month following collection. Credit card companies charge a percentage of sales when their card is used. These fees are collected immediately via electronic funds transfer. For planning purposes it is estimated that credit card fees average three percent of all sales and that the sales tax is collected from all customers, thus credit card fees are calculated as equal to three percent of 108 percent of all sales. Ihere are cash outflows associated with salary and wages. These are considered as a omponent of fixed costs. John' s brother and his sisters and their spouses occasionally work in the store as they are needed to fill in for those on vacation. College students also work in this business It is estimated that gross monthly payroll for all employees, both occasional and regular, will average $20,000 per month next ycar. Payday is the last business day of every month. Many of these working arrangements are expected to continue after Sam Cage retires, and it is not anticipated that the size and timing of payrolls will change as a result of retirement. In addition to labor costs there are rental costs. GREATENDEAVOR is currently located in a first class shopping center near residential areas and a large shopping mall. Rent is due the last business day of every month. The previous rental contract called for monthly payments equal to $900 per month. However, this contract expired in October of 2004. GREAT ENDEAVOR currently pays monthly an amount equal to the maximum of either S1,000 or two percent of the previous month' s sales. The rent is paid the last day of every month The business has changed locations several times in the last fifteen years. Each time the trouble and expense of moving has been significant. Also, as far as anyone can tell, moving in the past has never served to increase sales revenue. In any event, the rental agreement currently in-force will be binding until the end of 2006 Beyond the rent and the payroll expenses previously mentioned, there are other fixed costs: $2,000 per month advertising, about $1400 per month for utilities, and $600 for insurance. These costs are paid for as they are incurred. Also, there is depreciation expense associated with the investment in the silkscreen machine, a device that is used in lettering and decorating team jerseys caps, and shirts, and depreciation expense is also taken on computer equipment used in orderin l'otal depreciation expense per month is equal to $100. There are also income taxes. GREAT ENDEAVOR is incorporated, paying a corporate tax rate estimated by Jane Cage for planning purposes to equal thirty-five percent. (This is more than likely an over estimate.) Estimated income taxes are paid at the end of every quarter, the first quarter paid on March 31 and so forth 0 rican middle-class parents of school-age children who live in or near the small town where GREAT ENDEAVOR is located. They are price sensitive, but their needs are often fixed by the requirements of athletic teams to which their children belong. Participation in athletic leagues by ren is important to many families of this town. Approximately sixty-five percent of customers whose purchases are related to team sports are women shopping for their son/ daughter' s sporting clothes and equipment. Most customers shopping for their children use or can choose to use credit cards to make purchases, and most can be contacted by e-mail and cell phone after a sale is made to modify their initial purchase decisions. Service after the sale is very important to this group: often Describing Customers There are three kinds of customers served by GREAT ENDEAVOR. The largest number a Amer ods are to be returned and exchanged with these customers. se, most are A significant number of customers are not shopping for their children. Of the men in their thirties or forties. Customers in this group typically hunt quail and ducks fly-fisherman; or they play softball and/ or baskethall in an organized league. They very much rely upon sales personnel for advice as they choose equipment. Much of the equipment which they eventually purchase is quitc expensive. So, it is not unusual for these customers to make repeated visits before a sale is made. Customers of this group typically make large purchases of $200 and up They are not as price sensitive as team-sports customers, but they will refuse to pay more than what they would at a discounter for commonly available items. For customers in this category, the holiday season is an important shopping time. customers use or can choose to use mail and cell phone after a sale is made to modify their initial purchase decisions. Often be returned and exchanged with these customers. As is the case with team-sports customers, most of these credit cards to make purchases, and most can be contacted by e- A third group of customers are adults who want to stay physically fit. These neont people have buy running shoes, tennis shoes, and tennis and racquet-ball uipment from high-volume discount retailers when they first equipment of the customers use or can by e-mail and cell phone exerciscd for many y equipment. Having once bought eq started exercising, they now buy from GREATENDEAVOR where they find onl very highest quality. They are not price sensilive. About one-half of customers category are women. As is the case with team-sports customers, most ofthese choose to use credit cards to make purchases, and most can be contacted after a sale is made to modify their initial purchase decisions. lowever exchange or other kinds of service after sale is very unusual for customers of th cars. They who fit in th , requests or product egory Describing Cash flows Eighty percent of the business is retail, and twenty percent is with private schools. Retail customers pay at the time of sale with cash, check, or credit card. Most choose to use their credit card. Private schools also pay with a credit card, but this payment occurs one month after the sale. For both their retail and private school customers, there is no mcasurable bad debt experience to contend with both the private schools and the vast majority of retail customers have done business with GREAT ENDEAVOR for many years. A Sales History and a Forecast for 2005 are given in the exhibits below. The Cage family, and Jane Cage in particular, feel that these sales forecast numbers are very reliable. The business which serves these three kinds of customers is reasonably simple to understand. Exhibit 1. Great Endeavor Sporting Goods Monthly Sales Forecast S 120,000 July August September October $ 120,000 January 120,000 120,000 February 150,000 180,000 March 150,000 200,000 April May 150,000 November 180,000 120,000 June December 200,000 January 2006 120,000 Exhibit 2. Great Endeavor Sporting Goods Monthly Sales in 2004. January February 121,000 S 118,000 July 120,000 119,000 August 179,000 March 149.000 September April May June 199,000 October 151,000 150,000 November 180,000 122,000 December 200,000 are sh position is closely tied to inventory management. Inventory balances at carefully monitored by both Sam and John Cage. Current month ending inventory average eig percent of the next month's estimated Cost of Goods Sold. And cost of goods sold aver hty ag seventy-two percent of sales. Inventory and supplies are ordered from various vendors. At the end of every month purchases made in the previous month from these vendors are paid for in full. There is almost no theft loss associated with inventory. Employees, often a theft problem in a large business setting, are either trustworthy family members or honest college students that are well managed. College students come and go, but most work three or more years while they are in college, and many maintain friendly ties with the Cage family after they graduate. Customers are often friends of long standing. Shopping at GREAT ENDEAVOR is a family tradition for many The children of some customers can remember their parents buying them sports equipment from the Cage's years ago. Theft is no problem The management of cash balances is an important matter to Sam Cage. Years ago Sam Cage instituted a rule to hold a minimum cash balance equal to ten percent of next month' s estimated sales. In this regard, any cash balances over and above this target are used to repay any outstanding bank borrowing and, if this is fully accomplished, then excess funds are invested in a money market mutual fund. Currently this fund pays one-quarter of one percent a month. The current effective rate for this fund is equal to 3.04 percent. At year-end 2004 the investment in this money market mutual fund will equal zero a local bank. This bank has agreed to continue this practice after John Cage retires, perhaps because Sam Cage is willing to remain responsible for paying off any business debt owed the bank and because he is also willing to provide whatever collateral the bank requires. Borrowing is done at ed to provide loans of up to $50,000, charging one-half of one percent per month The bank has agre on the previous month' s bo 6.17 percent. At year-end 2004, Jane Cage projects that the balance owed the bank will be zero. rrowing. The effective annual interest rate for this source of financing i Describing the Competition The gross profit margin target for GREAT ENDEAVOR is only twenty-eight percent, low by industry standards. The Cages devote time to pricing decisions, pricing products available to retail customers at nearby discount centers as low as these discounters, so their customers need not worry about paying more than they should were they shopping at a discounter. GREAT ENDEAVOR deliberately chooses not to duplicate a sporting goods department of large discounters. The Cage family docs not sell swim wear, skating equipment, golfing equipment, bow-hunting gear, hunting and fishing licenses, most kinds of fishing gear, most kinds of football equipment, most finds of firearms, and they sell no ammunition whatsoever. GREATENDEAVOR sells merchandise connected with the sports of bascball, softball, basketball, soccer, fly fishing, duck hunting, tennis, racquetball and very little else. GREAT ENDEAVOR does things that no volume retailer can hope to emulate. The artistic ability of the owner' s family permits them to make team jerseys for the many local baseball, basketball, sofiball, soccer, and football teams; and to make flies for fly fisherman and decoys for duck hunters. These handmade wooden decoys could never be found at a volume retailer. They also re-string tennis and racquetball rackets, and rchabilitate old bamboo fly rods. Exhibit 3. Estimates of Tangible Asset Values as of Year-End 2004. S12,000 as 40,000 Accounts Reccivables 69,120 Inventory Silkscreen Equipment Computers, Telephones, Copier 5,000 10,000 Total $136,120 Analyzing Data Every year after Christmas-eve GREAT ENDEAVOR closes and does not reopen for business until the first business day after New Year's. It is a tradition that during this time members of the Cage's extended family travel to Sam and Mary Cage's vacation home in the Blue Ridge Mountains of North Carolina. This year during this family time together Jane Cage will assist both her father-in-law and her husband negotiate the transfer of ownership. The first question is about the value of the business. The total valuc of tangible assets as of year-end 2004 is estimated to be equal to $ 136,120. The only liability owed at ycar-end 2004 is an accounts payable of $ 97,920. All agree that the business is worth significantly more than the value of its net tangible assets of $ 38,200. Nevertheless, Sam Cage, knowing that John and Jane are currently putting their two children through college, cheerfully agrces to sell the business to his son John for only $40,000. This amount could be paid in equal quarterly installments of $10,000 each, the first payment scheduled for March 31 2005. Sam Cage also is willing to take less if Jane feels that the business could not afford to generate the cash flow to make such an agreement work. Both John and Jane would hate to sec Dad have to take less than $40,000. As the rest of the family leaves to go eat dinner at a local restaurant, Jane fires up her puter and pulls up her electronic spreadsheet package to get an answer to question number two. Will John Cage be able to take these quarterly payments out of the business without jeopardizing its survival? Create a cash budget for the twelve months of 2005. Assume in this cash budget that the quarterly payments to Sam Cage are made in a timely fashion. After you have made this ash budget, answer the question. Will John Cage be able to take these quarterly payments out of the business without jeopardizing its survival