Sea to Sky Clinic Mobile Clinic Scenario

You are an administrative intern at Sea to Sky Clinic. Sea to Sky Clinic is considering opening a new line of credit (short term loan) to cover periodic cash shortfalls. With a line of credit, Sea to Sky can borrow as much as they need, up to the agreed upon amount and pay it back when not needed. The benefit of a line of credit is that you are only paying borrowing costs when you need the cash. In other words, you are not paying interest on debt that you do not need.

Your boss has asked you to create a cash budget to help determine how much to ask for and help choose among the bank options they are considering.

Revenues are received evenly throughout the month (i.e. equal amount every day of the month). All of Sea to Skys patients pay the month following the service. The marketing director has provided you with their sales forecast.

Table 1: Sea to Sky Clinic revenues forecast

Month Sales

November 2022 $200,000

December 2022 $200,000

January 2023 $400,000

February 2023 $600,000

March 2023 $800,000

April 2023 $700,000

May 2023 $500,000

June 2023 $400,000

July 2023 $400,000

August 2023 $500,000

September 2023 $300,000

October 2023 $250,000

Sea to Sky Clinic pays all of their bills twice a month: on the 14^th and the 30^th. The accountant has provided you with the following information.

Equipment lease is $15,000 and paid on the 30^th of the month.

Salaries are paid twice a month: 15^th and the 30th

o Total monthly salaries for Clinical labor (physicians, PAs, Nurses) is $300,000 in January August, but drops to $200,000 per month September December.

o Total monthly administrative salaries are $50,000 per month

Supplies are paid for on the 14^th. Supply expense is 10% of the previous months sales

Monthly mortgage payments of $10,000 are paid on the 30^th of the month.

Miscellaneous expenses of $5000 per month are paid on the 30^th.

County Federal Credit Union has offered Sea to Sky a line of credit at 5% compounded weekly. Second Citizens Bank is offering a line of credit at 5.2% compounded monthly.

1) What is the semi-monthly cash budget for the clinic for 2023?

2) What is the maximum cash shortfall?

3) What impact would it have on the cash budget if revenues are 5% less than anticipated? (Assume the same payment pattern.)

4) What impact would it have on the cash budget if salaries are 2.5% more than anticipated?

5) What is your final recommendation on what the Sea to Sky Clinic should do? Support your decision.

Make sure our recommendation includes:

How large of a line of credit should Sea to Sky Clinic ask for

Which bank should Sea to Sky Clinic choose