Turban Hill Manufacturing Working Capital Management

You have recently been hired by Turban Hill Manufacturing to work in the newly established treasury department. Turban Hill Manufacturing is a small company that produces cardboard boxes in a variety of sizes for different purchasers. Gary Turban Hill, the owner of the company, works primarily in the sales and production areas of the company. Currently, the company puts all receivables in one shoe box and all payables in another. Because of the disorganized system, the finance area needs work, and thats what youve been brought in to do.

The company currently has a cash balance of $240,000, and it plans to purchase new box-folding machinery in the fourth quarter at a cost of $445,000. The machinery will be purchased with cash because of a discount offered. The companys policy is to maintain a minimum cash balance of $125,000. All sales and purchases are made on credit.

Gary Turban Hill has projected the following gross sales for each of the next four quarters:

Q1 Q2 Q3 Q4

Gross sales $1,240,000 $1,310,000 $1,370,000 $1,450,000

Also, gross sales for the first quarter of next year are projected at $1,290,000. Turban Hill currently has an accounts receivable period of 53 days and an accounts receivable balance of $630,000. 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.

Turban Hill typically orders 50 percent of next quarters projected gross sales in the current quarter, and suppliers are typically paid in 42 days. Wages, taxes, and other costs run about 30 percent of gross sales. The company has a quarterly interest payment of $130,000 on its long-term debt.

The company uses a local bank for its short-term financial needs. It pays 1.5 percent per quarter in all short-term borrowing and maintains a money market account that pays 1 percent per quarter on all short-term deposits.

Gary has asked you to prepare a cash budget and short-term financial plan for the company under the current policies. He has also asked you to prepare additional plans based on changes in several inputs.

QUESTIONS

1. Use the numbers given to complete the cash budget and short-term financial plan. (Group 1)

2. You have looked at the credit policy offered by your competitors and have determined that the industry standard credit policy is 1/10, net 40.* The discount will begin to be offered on the first day of the first quarter. You want 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 period 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 $100,000. What interest rate are you effectively offering customers?