Zhao and Fen would like to receive their annual dividend of $2 million on March 31, 20X5. However, they are concerned that there might not be enough cash available to make this payment.

Assume that the expansion does not take place and that all of the assumptions provided in the project details with respect to "Current operations (without the proposed expansion plans)" are valid except assume that inventory levels will remain at seven days. In addition, assume that sales, purchases and expenses occur evenly over the 365 days and that the dividends on the preferred shares will be paid regardless of whether the common-share dividend is paid.

Prepare a cash budget for the first quarter of 20X5 and make a conclusion as to whether the company will have adequate cash available to afford the requested dividend payment. Also make recommendations to Zhao and Fen regarding their forecasted cash balance.

GIVEN: Current operations (without the proposed expansion plans):

The company primarily sells its services to companies in the courier, mining and construction industries.

Revenues are expected to increase by 7% for 20X5.

The company's current credit policy is net 30 days. The company has only 15 customers in total. However, since these customers rely on timely delivery, they always settle their accounts on time. Historically, the company has had minimal bad debts.

Inventory consists of fuel enough for only seven days. However, the company has decided that seven days is not enough and is planning to increase its inventory on hand to 15 days.

The year-end accounts payable include trade payables of $10,520,000 (for aircraft costs, fuel and other operating costs) and payment due in the first quarter on new equipment of $7,790,000 (received prior to the year-end and included in PP&E). Suppliers are normally paid within 45 days, which are the standard terms in the industry.

Direct costs will grow at the same rate of sales, with the exception of crew costs. Crew costs are expected to only increase 3% due to the contractual agreement in place. Payroll is paid in the month incurred.

General and administration costs will increase by 2% for 20X5 and are paid in the same month as incurred. Selling and marketing costs will increase by 4% and are paid in the same month as incurred.

First quarter taxes payable are $647,000 and are paid in the same month as incurred.

Annual dividends on the preferred shares will be paid in the first quarter.

During 20X4, dividends on the common shares totalling $2 million were paid. It is forecasted that the same amount of dividends will be paid in 20X5.

Interest is paid on the outstanding bonds on January 31 and July 31.

Balance Sheet as at December 31, 20X4 (in $'000s) $

ASSETS

Current Cash 450

Accounts receivable 11,290

Inventory 870

12,610

Property, plant and equipment

Land 1,890

Buildings 13,820

Aircraft 34,060

Ground equipment 16,290

Office equipment 5,970

72,030

Total assets 84,640

LIABILITIES

Current

Trade and other payables 18,310

Non-current

Long-term debt 48,780

Total liabilities 67,090

Shareholders' equity

Preferred shares 600

Common shares 975

Retained earnings 15,975

Total shareholders' equity 17,550

Total liabilities and shareholders' equity 84,640

Income Sheet for the year December 31, 20X4 (in $'000s) $

Revenue 141,171

Direct expenses

Aircraft costs 21,370

Crew costs 11,560

Depreciation 9,670

Fuel costs 48,160

Other operating costs 15,820

106,580

Other costs

General and administration 19,560

Sales and marketing 630

20,190

Operating income 14,401

Interest expense 3,910

Earnings before taxes 10,491

Income taxes 2,623

Net income 7,868