Only a Game Inc.

Cash Budgeting

This really is great! Weve only been producing the Sticky Fingers for six months, and look at the profits. Sales projections for the future go nowhere but up, up, up! Im going to take my family on a well-deserved vacation. Theyve put up with a lot; I havent been home much at all getting this started. We need some quality time together. All this hectic activity has left me mighty tired, so a break would do me a lot of good right now.

T. L. Tina T. Rollt, President and Founder, Only a Game

Tina Rollt (her parents got a little carried away with names, giving her many problems when she was in school) founded her company in late 2010. She had worked as a product designer for a well-known toy company, developing new toys and games in keeping with the fashions of the times. Tina thought shed like to market some of her better ideas herself, and decided to invest her savings in founding a new company. She converted her savings into common stock, and taking the simple approach, she called the company Only a Game. Their first hit toy was a puzzle called Sticky Fingers, a handheld electronic puzzle requiring both dexterity and thinking skills.

Each Sticky Fingers costs the company $14 to produce. In addition to these production costs that vary in direct proportion to volume, the company also incurs $4,000 monthly costs just to be in business, irrespective of the months volume. Sticky Fingers sells to retailers for $22 each.

As of December 31, 2010, Only a Game had been producing Sticky Fingers for three months, using rented facilities. The balance sheet on December 31 looked as follows:

Only a Game Company

Balance Sheet

December 31, 2010

Assets

Cash $56,500

Accounts receivable 27,500

Inventory 14,000

Total assets $98,000

Equities

Common Stock $100,000

Retained earnings -2000

Total equities $98,000

Rollt was very pleased to be operating at a profit in such a short time. December sales had been 750 units, up from 500 in November, enough to report a profit for the month and to reduce the deficit accumulated in October and November. Sales were projected to be 1,000 units in January, and Rollts projections showed sales increases of 500 units per month after that. Thus, by May, monthly sales were expected to be 3,000 units. By September, that figure would be 5,000 units.

Rollt was very conscious of the importance of developing good sales channel relationships in order to increase sales, so Sticky Fingers deliveries were always prompt. This required production to be scheduled 30 days in advance of predicted sales. For example, Only a Game produced 1,000 Sticky Fingers in December in anticipation of January sales, and planned to produce 1,500 in January for Februarys anticipated demand.

The company billed its customers with stated terms of 30 days net, but had not spent a lot of effort in enforcing these credit terms, with the result that customers appeared to actually be taking an additional month to pay. All of the companys costs (production and operating) were paid in cash in the month they were incurred.

Tinas projections were accurate. By March, sales had reached 2,000 Sticky Fingers, and 2,500 were produced in March for April sale. Total profit for the first quarter of the year 2011 (the end of March) had reached $24,000. In order to get a respite from what had been a very hectic 6 months getting her business started, Tina decided to take her family on a much-deserved vacation in early April (see above).

Tina had hardly been gone for a week when her cell phone rang. It was her bookkeeper, who was in a panic. The companys bank balance was nearly at zero, so materials needed for April production could not be purchased. Unless Tina returned immediately to raise more cash, the entire operation would grind to a halt within a few days.

Requirements:

Based on the facts given in the case, each amount in the Balance Sheet, including Retained Earnings, is reconciled through December 31. Please take a careful look at the reconciliation template (it is provided for your reference.) in order to understand the cost flow from when the company first began. Please assume that the companys policy is to obtain loans at the same, exact amount as needed when necessary and pay them back whenever the company has positive cash balance. (Interest expense is not to be considered in this case analysis.)

1.Prepare monthly income statements, production budgets (units and amounts), cash budgets, and balance sheets based on sales increases of 500 units per month, 60-day collections, and 30-day advance production for January through November 2011. The template includes a guide for this.

2.When will the company need to borrow funds? When will they be able to repay the loan?

3.How is it possible for a company that starts with $100,000 in capital and has profitable sales for a period of six months to end up with a zero bank balance? In general terms, explain why they needed money in April?

4.How could this problem have been avoided?

After preparing the budgets (Question 1) and reviewing the situation, what would you have suggested that Tina should have done in managing the situation? Prepare a revised version of Question 1 based on your suggestions. The best responses will show two major operating changes. Please present each revised change separately to show the impact to the cash position. Then prepare a combined worksheet to show the impact of these suggestions working together.

Your final work product will be an Excel workbook with 4 separate worksheet tabs.

Any written responses or comments should be entered into a text box within the excel document. (For Q 2,3 and 4)

1.The worksheet from Question 1.

2.Revised worksheet representing the impact of your first suggestion for operating the company. (modifies worksheet from Q 1)

3.Revised worksheet representing the impact of your second suggestion for operating the company. (Again, modifies worksheet from Q 1)

4.Revised worksheet demonstrating the impact of both suggestions taken together.

5.Points will be deducted if you do not utilize the excel functions when completing the assignment.