WORKING CAPITAL MANAGEMENT You have recently been hired to work in your companys newly established treasury department. The company is a small company that produces cardboard boxes in a variety of sizes for different purchases. 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 you have been brought in to do. The company currently has a cash balance of $305,000 and it plans 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 companys policy is to maintain a minimum cash balance of #125,000. All sales and purchases are made on credit. The owner has projected the following gross sales for each of the next four quarters.

Q1 Q2 Q3 Q4

Gross sales $1,310,000 $1,390,000 $1,440,000 $1,530,000

Also, gross sales for the first quarter of the next year are projected at $1,405,000. The company currently has an accounts receivable period of 53 days and an accounts receivable balance of $645,000. 20% 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. The company typically orders 50% of the 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% of gross sales. The company has a quarterly interest payment of $135,000 on its long tern debt. The company uses a local bank for its short-term financial needs. It pays 1.5% per quarter on all short-term borrowing and maintains a money market accounts that pays 1% per quarter on all short-term deposits. You have been asked to prepare a cash budget and short-term financial plan for the company under the current policies. You have also been asked to prepare additional/alternative plans based on changes in several inputs.

Respond to the following questions. Written responses must comprise at least three complete sentences, with proper grammar and punctuation. Cite any referenced materials using APA format. In the Excel spreadsheets provided, all calculations that support your answers must be shown as formulae. 1. Use the numbers given to complete the cash budget and short-tern financial plan in Excel. (Sheet 1) 2. Rework the cash budget and short-term financial plan assuming the minimum balance is changed to $100,000 (Sheet 2) 3. You have looked at the credit policy offered by the competition and determined that the industry standard credit policy is 1/19 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% of all sales will take advantage of it, and the outstanding accounts receivable period will decline to 36 days. a. Rework the cash budget and short-term financial plan under the new credit policy and a minimum cash balance of $100,000. (Sheet 3) b. What interest rate are you effectively offering your customers? 4. You have talked to the companys suppliers about the credit terms that you receive. Currently, the company receives terms of net 45. The suppliers have stated that they would offer new credit terms of 1.5/15, net 40. The discount would begin to be offered on the first day of the first quarter. a. What interest rate are suppliers offering the company? b. Rework the cash budget and short-term financial plan assuming you take the offered credit terms on all orders and the minimum cash balance is $100,000. Also assume the company offers the credit terms detailed in Question 3. (Sheet 4)

(your name) MANUFACTURING CASH BUDGET 01 Target Cash Balance Net Cash inflow Ending cash balance Minimum Cahs balance Cumulative surplus/(deficit) your name) MANUFACTURING SHORT TERM FINANCIAL PLAN 01 02 03 04 Target Cash Balance Net Cash inflow New short term investments Income from short term investments Short term investments sold Mew short term borrowing Interest on short term borrowing Short term borrowing repaid Ending Cash Balance Minumum Cash Balance Cumulative surplus/(deficit) Beginning short term investments Ending short term investments Beginning short term debt Ending short term debt Sheet1 Sheet2 Sheet3 Sheet4 + Ready @ - (your name) MANUFACTURING CASH BUDGET 01 Target Cash Balance Net Cash inflow Ending cash balance Minimum Cahs balance Cumulative surplus/(deficit) your name) MANUFACTURING SHORT TERM FINANCIAL PLAN 01 02 03 04 Target Cash Balance Net Cash inflow New short term investments Income from short term investments Short term investments sold Mew short term borrowing Interest on short term borrowing Short term borrowing repaid Ending Cash Balance Minumum Cash Balance Cumulative surplus/(deficit) Beginning short term investments Ending short term investments Beginning short term debt Ending short term debt Sheet1 Sheet2 Sheet3 Sheet4 + Ready @