Short Term Financial Planning and Management PART 7 638 MINICASE Piepkorn Manufacturing Working Capital Management borrowing and maintains a money market accoust thut p 1 percent per quarter on all short-term deposits Gary has asked you to prepare a cash budget and dn term financial plan for the company under the current policin He has also asked you to prepare additional plans based changes in several inputs. You have recently been hired by Piepkorn Manufacturing to work in the newly established treasury department. Piepkorn Manufacturing is a small company that produces cardboard boxes in a variety of sizes for different purchasers. Gary Piepkorn, the ouwner of the company, works primarily in the sales and production areas of the company. Currently, the com- pany puts all receivables in one shoe box and all payables in another. Because of the disorganized system, the finance area needs work, and that's what you've been brought in to do. The company curreatly has a cash balance of $305,000, and it QUESTIONS 1. Use the numbers given to complete the cash budget and short-term financial plan. 2. Rework the cash budget and short-term financial plan assuming Piepkorn changes to a minimum balance of to purchase new box-folding machinery in the fourth quarter at a cost of $525,000. The machinery will be purchased with cash because of a discount offered. The company's policy is to maintain a minimam cash balance of $125,000. All sales and purchases are made on credit Gary Piepkorn has projected the following gross sales for each of the next four quarters S100,000. 3. You have looked at the credit policy offered by Piepkon's competitors and have determined that the industry stas dard credit policy is 1/10, net 40. The discount will begi to be offered on the first day of the first quarter. You wa to examine how this credit policy would affect the cash budget and short-term financial plan. If this credit policy is implemented. you believe that 40 percent of all sales will take advantage of it, and the accounts receivable pe- riod will decline to 36 days Rework the cash budget and short-term financial plan under the new credit policy and a minimum cash balance of S100,000. What interest ralt you effectively offering customers? 4. You have talked to the company's suppliers about tie credit terms Piepkorn receives. Currently, the comp receives terms of net 45. The suppliers have staled t they would offer new credit terms of 1.5/15, net 40 discount would begin to be offered on the first day of first quarter. What interest rate are the suppliers ofie the company? Rework the cash badget and short-serm financial plan assuming you take the credit terms on al orders and the minimum cash balance is S100,000 Abe assume that Piepkorn offers the credit terms detailed in Question 3. Q1 02 03 04 Gross $1,310,000 $1,390,000 $1.440,000 $1,530,000 sales Also, gross sales for the first quarter of the next year are projected at $1,405,000. Piepkorn currently has an accounts receivable period of 53 days and an accounts receivable bal- ance of S645,000. Twenty percent of the accounts receivable balance is from a company that has just entered bankruptcy and it is likely this portion of the accounts receivable will never be collected. Piepkorn typically orders 50 percent of next quarter's pro- jected gross sales in the current quarter, and suppliers are typ- ically paid in 42 days. Wages, taxes, and other costs run about 30 percent of gross sales. The company has a quarterly interest payment of S135,000 on its long-term debe The company uses a local bank for its short-term finan- cial needs. It pays 1.5 percent per quarter on all short-term PIEPKORN MANUFACTURING Cash Budget 91 02 Target cash balance 03 04 Net cash inflow Ending cash balance Minimum cash balance Cumulative surplus (deficit you are not familiar with credit policy quotaticns, see Chapser 20 639 Chapter 18 Short-Term Finance and Planning PIEPKORN MANUFACTURING Short-Term Financial Plan Q1 Q4 Q2 Q3 Target cash balance leur nepencM Net cash inflow New short-term investments Income from short-term investments Short-term investments sold New short-term borrowing Interest on short-term borrowing Short-term borrowing repaid Ending cash balance Minimum cash balance Cumulative surplus (deficit) Beginning short-term investments Ending short-term investments Beginning short-term debt Ending short-term debt Short Term Financial Planning and Management PART 7 638 MINICASE Piepkorn Manufacturing Working Capital Management borrowing and maintains a money market accoust thut p 1 percent per quarter on all short-term deposits Gary has asked you to prepare a cash budget and dn term financial plan for the company under the current policin He has also asked you to prepare additional plans based changes in several inputs. You have recently been hired by Piepkorn Manufacturing to work in the newly established treasury department. Piepkorn Manufacturing is a small company that produces cardboard boxes in a variety of sizes for different purchasers. Gary Piepkorn, the ouwner of the company, works primarily in the sales and production areas of the company. Currently, the com- pany puts all receivables in one shoe box and all payables in another. Because of the disorganized system, the finance area needs work, and that's what you've been brought in to do. The company curreatly has a cash balance of $305,000, and it QUESTIONS 1. Use the numbers given to complete the cash budget and short-term financial plan. 2. Rework the cash budget and short-term financial plan assuming Piepkorn changes to a minimum balance of to purchase new box-folding machinery in the fourth quarter at a cost of $525,000. The machinery will be purchased with cash because of a discount offered. The company's policy is to maintain a minimam cash balance of $125,000. All sales and purchases are made on credit Gary Piepkorn has projected the following gross sales for each of the next four quarters S100,000. 3. You have looked at the credit policy offered by Piepkon's competitors and have determined that the industry stas dard credit policy is 1/10, net 40. The discount will begi to be offered on the first day of the first quarter. You wa to examine how this credit policy would affect the cash budget and short-term financial plan. If this credit policy is implemented. you believe that 40 percent of all sales will take advantage of it, and the accounts receivable pe- riod will decline to 36 days Rework the cash budget and short-term financial plan under the new credit policy and a minimum cash balance of S100,000. What interest ralt you effectively offering customers? 4. You have talked to the company's suppliers about tie credit terms Piepkorn receives. Currently, the comp receives terms of net 45. The suppliers have staled t they would offer new credit terms of 1.5/15, net 40 discount would begin to be offered on the first day of first quarter. What interest rate are the suppliers ofie the company? Rework the cash badget and short-serm financial plan assuming you take the credit terms on al orders and the minimum cash balance is S100,000 Abe assume that Piepkorn offers the credit terms detailed in Question 3. Q1 02 03 04 Gross $1,310,000 $1,390,000 $1.440,000 $1,530,000 sales Also, gross sales for the first quarter of the next year are projected at $1,405,000. Piepkorn currently has an accounts receivable period of 53 days and an accounts receivable bal- ance of S645,000. Twenty percent of the accounts receivable balance is from a company that has just entered bankruptcy and it is likely this portion of the accounts receivable will never be collected. Piepkorn typically orders 50 percent of next quarter's pro- jected gross sales in the current quarter, and suppliers are typ- ically paid in 42 days. Wages, taxes, and other costs run about 30 percent of gross sales. The company has a quarterly interest payment of S135,000 on its long-term debe The company uses a local bank for its short-term finan- cial needs. It pays 1.5 percent per quarter on all short-term PIEPKORN MANUFACTURING Cash Budget 91 02 Target cash balance 03 04 Net cash inflow Ending cash balance Minimum cash balance Cumulative surplus (deficit you are not familiar with credit policy quotaticns, see Chapser 20 639 Chapter 18 Short-Term Finance and Planning PIEPKORN MANUFACTURING Short-Term Financial Plan Q1 Q4 Q2 Q3 Target cash balance leur nepencM Net cash inflow New short-term investments Income from short-term investments Short-term investments sold New short-term borrowing Interest on short-term borrowing Short-term borrowing repaid Ending cash balance Minimum cash balance Cumulative surplus (deficit) Beginning short-term investments Ending short-term investments Beginning short-term debt Ending short-term debt