Working Capital Management

FIN 354

Chapter Four: Cash Credit and Short-Term Financial Instruments

Helpful Homework Hints

Possible Points: 15

Dinner Bell Hotel Analysis: Pages 217221; Questions #1, #2, and #8 only.

In your analysis of Dinner Bell Hotel, you will be calculating the firms projected cash budget for the months of February through August. An Excel file containing a template for Dinner Bell Hotels month-by-month cash budget is found at the Content link at our course Web site. You are welcome to use this template file as you prepare the cash budget for the Dinner Bell Hotel.

**Note: We will be completing only Questions #1, #2, and #8 found on pages 220221.

Question #1 on page 220:

Question #1 asks that you prepare the month-by-month cash budget for the Dinner Bell Hotel for the months of FebruaryAugust. The assumptions and values needed for the month-by-month cash budget are described in this case study in the textbook. However, several key assumptions and calculations are shown below.

In the center of page 220 in the textbook, the following assumptions are listed:

• The required minimum cash balance that the Dinner Bell Hotel keeps on hand at its bank is $50,000.
• The Cash balance at the beginning of February is $400,000.

Sales by month are listed in Exhibit C1.1 on page 221. In the center of page 220, it mentions that 65% of the hotels sales are paid in cash (i.e., collected in the month in which the sale is made). The other 35% are charged by the customers and collected in the month after the sale is made. Based on this assumption, the Cash Collections for February can be calculated as follows:

.65 X February Sales of $180,000 = $117,000

.35 X January Sales of $157,500 = $ 55,125

Total cash collections in February: $117,000 + $55,125 = $172,125

You would use the above formulas to calculate the cash collections for each month during the February through August time-frame.

Amounts purchased from Suppliers on credit are listed in Exhibit C1.1 on page 221. In the center of page 220, it also mentions, Supplier expenses in November were $85,000 and in December were $45,000. One-third of the supplier expenses are paid one month after they are incurred and two-thirds in two months.

Based on this information about supplier purchases, the cash outflow for supplier purchases in February can be calculated as follows:

1/3 paid one month after they are incurred:

$45,000 January purchases X .3333 = $14,998.50

2/3 are paid two months after they are incurred:

$45,000 December purchases X .6667 = $30,001.50

These two values can be totaled to calculate the amount paid for supplier purchases in February:

$14,998.50 + $30,001.50 = $45,000

Net Cash for each month listed on the Excel file containing the cash budget template can be calculated using the following formula:

Total Cash In - Total Cash Disbursements = Net Cash

The Ending Cash Balance for each month on the cash budget template can be calculated using the following formula:

Net Cash + Beginning Cash Balance = Ending Cash Balance

The Ending Cash Balance must equal or exceed $50,000 each month, or the firm will have to borrow to make up the shortfall. In months in which the Ending Cash Balance is greater than $50,000, the excess cash above $50,000 can first be used to pay down or retire any outstanding borrowings. Any excess cash remaining after all borrowings have been repaid can be invested and entered in the Cumulative Cash to Invest line on the cash budget template Excel file.

Question #2 on page 220:

Based on the information provided in the second full paragraph on page 218, the Dinner Bell Hotel appears to have a seasonal business, with a busy time of year and a slower time of year. You might consider this information and the likelihood of what would be seen on a cash budget for the months of September, October, and November as you answer Question #2.

Question #8 on page 221:

When answering Question #8, you might consider the level of cash reserves and the value of a possible bank credit line that a firm with Sales at the level of the Dinner Bell Hotel might have vs. the values for these items for a very large firm, such as Exxon. This may help to give insight into the importance of careful cash forecasting needed by a firm with Sales at the level of the Dinner Bell Hotel.