Toy World Page 230

Solution to Toy World, Inc.

Case 32A Toy World, Inc. Cash Budgeting
Copyright 1996 by the Dryden Press. All rights reserved.

CASE INFO !ATION PURPO ! "his #ase analy$es a straight%or&ard #ash b'dgeting proble(. )t is designed to ill'strate the (e#hani#s o% a #ash b'dget and the &ay #ash b'dgets are 'sed. Dis#'ssion *'estions %o#'s on the rationale behind the 'se o% #ash b'dgets as &ell as on their inherent proble(s. "he #ase also raises the iss'es o% the target #ash balan#e+ the opti(al si$e o% the #redit line+ the invest(ent o% e,#ess #ash+ and prod'#tion s#hed'ling %or a seasonal b'siness. ")-! R!.U)R!D /itho't 'sing the (odel+ 301 ho'rs o% st'dent preparation sho'ld be ade*'ate %or (ost st'dents+ &ith possibly another ho'r or so to &rite 'p the #ase i% it ('st be handed in. Use o% the spreadsheet (odel #an greatly red'#e preparation ti(e+ espe#ially i% the #o(pleted (odel or the easy (a#ro version is given to st'dents. CO-P2!3)"4 A relatively si(ple+ b't &ith a %air a(o'nt o% n'(ber #r'n#hing %or st'dents not 'sing the spreadsheet (odel. 5o&ever+ a n'(ber o% related iss'es #an be dis#'ssed+ so st'dents #an p't in a signi%i#ant a(o'nt o% ti(e on the #ase. till+ they #an get the gist o% it &itho't too ('#h tro'ble. /A4 /! 5A6! U !D "5! CA ! /e have 'sed this #ase in t&o very di%%erent &ays. 7irst+ &ith both introd'#tory and not very0&ell0prepared se#ond #o'rse st'dents+ &e as8 the( to read the #ase and to be#o(e generally %a(iliar &ith it+ and then &e go thro'gh the #ase in #lass in lie' o% a le#t're to ens're that st'dents see the iss'es involved. /hen &e 'se the #ase in this (anner+ &e al&ays assign the dire#ted version. "he *'estions in the dire#ted version lead st'dents thro'gh the topi#s &e &ant to address+ and they provide str'#t're to the #lass. "he #ase itsel% sets the #onte,t in &hi#h all #al#'lations and de#isions are (ade+ and this o%ten &or8s better than a p're le#t're be#a'se the #ase (a8es the (aterial see( 9(ore relevant.9 /e parti#'larly li8e this 'sage &ith evening st'dents and:or e,e#'tives and (anagers. /ith (ore advan#ed st'dents+ &e assign the #ase to 201 person tea(s. One tea( is as8ed to present their %indings and #on#l'sions to the #lass+ and the other tea(s are as8ed to prepare &ritten reports ;< page (a,i('( %or te,t+ pl's e,hibits=. /e as8 the st'dents to play the role o% internal or e,ternal #ons'ltants+ reporting to (anage(ent. /hen the #ase is assigned in this (anner+ &e highly re#o((end the non0dire#ted version. /ith the dire#ted version+ the presentation and reports are too (e#hani#al00 st'dents >'st ans&er the spe#i%i# *'estions. /ith the non0dire#ted version+ st'dents have (ore s#ope to #onsider di%%erent things+ and to 'se di%%erent n'(bers in arriving at their 9ans&ers.9 "his (a8es things (ore interesting+ and dis#'ssions a(ong the st'dents are (ore li8ely to arise.

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)n either type 'sage+ &e tell st'dents to read the relevant #hapter in their te,tboo8 in #on>'n#tion &ith &or8 on the #ase. ;O'r st'dents are as8ed to have a standard %inan#e te,tboo8 %or re%eren#e in the #o'rse. o(e te,ts &or8 better than others %or re%eren#e p'rposes+ b't all te,ts #over the (aterial in this and other #ases.= /e also tell st'dents that in this #ase+ as in the real &orld+ they (ay not be provided all the data and other in%or(ation they &o'ld li8e. "hen &e tell the( that i% an iss'e is addressed in the te,t #hapter that see(s relevant to the #ase+ b't no data is provided in the #ase+ that &e &ill give the( 9bro&nie points9 %or dis#'ssing ho& they+ as #ons'ltants+ &o'ld go abo't getting the (issing data and then 'sing it+ and &e en#o'rage the( to (a8e 'p realisti# data and then analy$e it &ithin the #onte,t o% the #ase. "his so(eti(es %or#es st'dents to thin8 abo't di%%i#'lt b't relevant iss'es+ and it really opens things 'p in ter(s o% giving the( s#ope %or digging into the s'b>e#t. /e have had st'dents loo8 'p %'t'res (ar8et data+ yield #'rve data+ and so %orth. O% #o'rse+ &e have had other st'dents &ho >'st do the (ini('( a(o'nt o% &or8 #alled %or dire#tly in the #ase. ?'t the non0dire#ted #ase does give st'dents s#ope to go on &ith e,tra &or8 i% they &ant to. @O@0D)R!C"!D CA ! ")P "his #ase #o(es in both dire#ted and non0dire#ted versions. )% yo' are 'sing the non0 dire#ted version00the version &itho't end0o%0#ase *'estion00yo'r st'dents &ill re#eive general g'idan#e in the #ase+ b't they &ill not have a spe#i%i# list o% *'estions to ans&er. "h's+ the %irst step that st'dents ('st ta8e in solving the non0dire#ted version o% this #ase is to develop a sol'tion strategy. "hen+ they ('st e,e#'te their strategy to arrive at a #ase sol'tion. /hen &e 'se the non0dire#ted version o% this #ase+ &e tend to give st'dents a great deal o% latit'de. O% #o'rse+ &e e,pe#t all st'dents to do a #redible >ob o% #reating the base #ase. ?eyond that+ ho&ever+ &e tend to (ost re&ard those st'dents that dig deepest into the #ase and thereby dis#over that there is a lot (ore s'b>e#tivity to #apital b'dgeting #ash %lo& analysis than %irst appears. As in the real &orld+ &e re&ard innovation and #reativity (ore that (ere (i(i#ry+ ass'(ing o% #o'rse that so'nd %inan#ial prin#iples are not violated. in#e the dire#ted and non0dire#ted versions o% this #ase are very si(ilar+ the sol'tion to the dire#ted version that &e present here provides an e,#ellent prototype sol'tion to the non0dire#ted version. )n %a#t+ &e %ollo& the dire#ted #ase sol'tion &hile st'dents are (a8ing #lass presentations o% their sol'tions to the non0dire#ted #ase. /e then raise those iss'es that st'dents (iss in their analysis either d'ring or a%ter the presentation. )n that &ay+ &e ens're that the (ain points o% the #ase are #overed. )@ "RUC"OR PR!PARA")O@ Regardless o% &hi#h version yo' 'se+ &e re#o((end that yo' read thro'gh the #ase and then read thro'gh the *'estions and ans&ers provided in this sol'tion. "he *'estions are %ro( the dire#ted #ase+ and they to'#h on (ost o% the points that o##'rred to 's and that st'dents are li8ely to bring 'p &hen they go thro'gh the #ase. Obvio'sly+ other points #o'ld be (ade+ b't the *'estions and ans&ers &ill give yo' a good idea o% ho& &e deal &ith the #ase.

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!O"E# INFO !ATION D! CR)P")O@ "he spreadsheet (odel %or this #ase+ %ilena(e CA !32A)+ #reates both a (onthly and a daily b'dget on the basis o% a set o% inp't variables. @ote that all per#entages ('st be entered in their de#i(al %or(. "he -OD!20A!@!RA"!D DA"A se#tion is #al#'lated in a relatively straight%or&ard (anner00 no #o(ple, e*'ations or (anip'lations are 'sed. "he only potential #on%'sion &o'ld probably o##'r in the e,pe#ted sales vers's the reali$ed sales se#tion. 5ere &e have based #olle#tions on reali$ed sales+ b't e,penses are #al#'lated 'sing e,pe#ted sales. "his has the e%%e#t o% (a8ing all e,penses %i,ed &ith respe#t to %ore#asted sales regardless o% reali$ed sales+ &hi#h is the ass'(ption 'sed in .'estion 9. "he )@PU" DA"A and B!4 OU"PU" se#tions are sho&n belo&C )@PU" DA"AC Pro>e#ted alesC @ov De# Dan 7eb -ar Apr -ay D'ne D'l A'g ales as G o% %ore#ast 199< EF00+000 92<+000 1996 E<00+000 300+000 2F0+000 22<+000 200+000 2<0+000 3<0+000 100+000 100G Cost DataC 6ariable #ostsC -aterials 30G ;G paid be%ore sale= 2 (onths prior 60G 1 (onth prior 10G 2abor 10G ;G paid be%ore sale= 2 (onths prior <0G 1 (onth prior <0G B!4 OU"PU"C @et Cash 7lo& Dan ;E2F9+100= 7eb EH9+0<0 -ar ;E131+960= Apr ;E93+F2<= -ay ;E190+100= D'n ;E132+000=

C'( ;2oan= or 'rpl's Dan E2F9+100 7i,ed CostsC 7eb E36F+1<0 -onthly -ar E236+190 Aen:ad(in e,pense E9<+000 Apr E112+36< 2ease pay(ent 60+000 -ay ;E1F+03<= Depre#iation 1H+<00 D'n ;E1F0+03<= -is# e,pense 10+000 .'arterly "a,es E90+000 e(i0ann'ally )nterest EF0+000 D'ne only @e& e*'ip(ent E100+000

Cash ?alan#e DataC "gt balan#e ?eg #ash E1<0+000 1<0+000 1< 2.0G 3<G 30 60G 60 <G

Colle#tions DataC Dis# period Dis# G G ta8ing dis# @et period G #'sto(ers 2ate period G paying late

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Ta$le %& !onthly Cash Budget Wor'sheet ). CO22!C")O@ A@D PA4-!@" @ove(ber De#e(ber Aross sales ;e,pe#ted= EF00+000 E92<+000 Aross sales ;reali$ed= EF00+000 E92<+000 Colle#tionsC -onth o% sale E2H1+100 1 (onth a%ter sale 2 (onths a%ter sale "otal #olle#tions P'r#hasesC E1<0+000 Pay(entsC 2 (os prior to sale 90+000 1 (o prior to sale "otal p'r#hases E31H+2H< 1F0+000 Dan'ary E<00+000 E<00+000 E1H1+<00 <<<+000 10+000 EH66+<00 EF1+000 <0+100 36+000 EF6+100 7ebr'ary E300+000 E300+000 E102+900 300+000 16+2<0 E119+1<0 E6H+<00 10+<00 33+600 EH1+100 -ar#h E2F0+000 E2F0+000 E96+010 1F0+000 2<+000 E301+010 E60+000 36+000 2H+000 E63+000 April E22<+000 E22<+000 EHH+1H< 16F+000 1<+000 E260+1H< EH<+000 1<+000 21+000 E69+000 -ay E200+000 E200+000 E6F+600 13<+000 11+000 E21H+600 E10<+000 63+000 30+000 E93+000 D'ne E2<0+000 E2<0+000 EF<+H<0 120+000 11+2<0 E21H+000 E120+000 H2+000 12+000 E111+000

E90+000 <1+000 60+000

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Ta$le % (continued) )). CA 5 AA)@ OR 2O Colle#tions Pay(entsC P'r#hases 2abor 2 (os prior to sale 1 (o prior to sale Aeneral: ad(inistrative e,p 2ease -is#ellaneo's e,penses "a,es )nterest ;on bonds= @e& e*'ip(ent "otal pay(ents @et #ash gain ;loss= 7OR -O@"5 Dan'ary EH66+<00 EF6+100 <6+000 60+000 9<+000 60+000 10+000 F0+000 E1HH+100 E2F9+100 E3H0+100 EH9+0<0 E133+000 ;E131+960= E3<1+000 ;E93+F2<= E10F+000 ;E190+100= 100+000 E619+000 ;E132+000= 7ebr'ary E119+1<0 EH1+100 1<+000 <6+000 9<+000 60+000 10+000 -ar#h E301+010 E63+000 10+000 1<+000 9<+000 60+000 10+000 90+000 April E260+1H< E69+000 <0+000 10+000 9<+000 60+000 10+000 -ay E21H+600 E93+000 H0+000 <0+000 9<+000 60+000 10+000 D'ne E21H+000 E111+000 F0+000 H0+000 9<+000 60+000 10+000 90+000

))). CA 5 URP2U OR 2OA@ R!.U)R!-!@" Dan'ary 7ebr'ary Cash at start i% no borro&ing is done E1<0+000 EH39+100 C'('lative #ash EH39+100 EF1F+1<0 "arget #ash balan#e 1<0+000 1<0+000 'rpl's #ash or total loans o'tstanding to (aintain E2F9+100 E36F+1<0

-ar#h EF1F+1<0 E6F6+190 1<0+000 E236+190

April E6F6+190 E<92+36< 1<0+000 E112+36<

-ay E<92+36< E101+96< 1<0+000 ;E1F+03<=

D'ne E101+96< ;E30+03<= 1<0+000 ;E1F0+03<=

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Ta$le 2& "aily Cash Budget Wor'sheet ). CO22!C")O@ A@D PA4-!@" DayC 1 Aross sales E16+129 Colle#tionsC Dis#o'nt payers @et payers 2ate payers "otal #olle#tions E16+H02 P'r#hasesC Pay(ents 2 (os prior to sale 1 (o prior to sale "otal p'r#hases E16+129 E10+23< 1H+903 1+333 E29+1H1 EF1+000 <0+100 36+000 EF6+100 2 E16+129 E10+23< 1H+903 1+333 E29+1H1 < target #ash balan#e 6 E16+129 E10+23< 1H+903 1+333 E29+1H1 1< E16+129 E10+23< 1H+903 1+333 E29+1H1 16 E16+129 E<+<32 1H+903 1+333 E21+H69 E<+<32 9+6HH 1+192 31

E16+129 E10+23< 1H+903 1+333 E29+1H1

E0

E0

E0

E0

E0

E0

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Ta$le 2 (continued) )). CA 5 AA)@ OR 2O DayC Colle#tions E16+H02 Pay(entsC P'r#hases 2abor 2 (os be%ore sale 1 (o be%ore sale Aeneral: ad(in e,pense 2ease -is# e,penses "a,es )nterest ;on bonds= "otal pay(ents @et #ash gain ;loss= E1<+111 7OR DA4 1 E29+1H1 2 E29+1H1 < E29+1H1 EF6+100 E2F+000 30+000 1H+<00 60+000 1+290 E166+H90 ;E13H+319= E2F+000 30+000 1H+<00 1+290 E1+290 E2F+1F1 1+290 EFH+690 ;E<F+219= 1+290 E1+290 E2F+1F1 1+290 F0+000 E1F6+H90 ;E1<H+319= 1+290 E1+290 23+1HF 1+290 E1+290 6 E29+1H1 1< E29+1H1 16 E21+H69 31

))). CA 5 URP2U OR 2OA@ R!.U)R!-!@" C DayC 1 2 Cash at start i% no borro&ing is done EHFH+6<0 E1<0+000 E312+6F1

< E39H+221

6 E339+00<

1< E<92+633

16 E13<+311

31

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C'('lative #ash EF03+061 "arget #ash balan#e 1<0+000 'rpl's #ash or total loans o'tstanding to (aintain target #ash balan#e E3<3+061

E312+6F1 1<0+000

E310+F62 1<0+000

E339+00< 1<0+000

E36H+1F< 1<0+000

E13<+311 1<0+000

E1<F+H92 1<0+000

;E13H+319 =

;E109+13F=

;E110+99<=

;EF2+F1<=

;E11+6F6=

EF+H92

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Ta$le 3& !onthly Cash Budget Wor'sheet Including Interest Inco*e+ E,-ense ). CO22!C")O@ A@D PA4-!@" @ove(ber De#e(ber Dan'ary 7ebr'ary -ar#h Aross sales ;e,pe#ted= EF00+000 E92<+000 E<00+000 E300+000 E2F0+000 Aross sales ;reali$ed= EF00+000 E92<+000 E<00+000 E300+000 E2F0+000 Colle#tionsC -onth o% sale E2H1+100 1 (onth a%ter sale 2 (onths a%ter sale "otal #olle#tions P'r#hasesC E1<0+000 Pay(ents 2 (os prior to sale 90+000 1 (o prior to sale "otal p'r#hases E90+000 <1+000 60+000 E31H+2H< 1F0+000 E1H1+<00 <<<+000 10+000 EH66+<00 EF1+000 <0+100 36+000 EF6+100 E102+900 300+000 16+2<0 E119+1<0 E6H+<00 10+<00 33+600 EH1+100 E96+010 1F0+000 2<+000 E301+010 E60+000 36+000 2H+000 E63+000

April E22<+000 E22<+000 EHH+1H< 16F+000 1<+000 E260+1H< EH<+000 1<+000 21+000 E69+000

-ay E200+000 E200+000 E6F+600 13<+000 11+000 E21H+600 E10<+000 63+000 30+000 E93+000

D'ne E2<0+000 E2<0+000 EF<+H<0 120+000 11+2<0 E21H+000 E120+000 H2+000 12+000 E111+000

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Ta$le 3 (continued) )). CA 5 AA)@ OR 2O 7OR -O@"5 Dan'ary EH66+<00 EF6+100 <6+000 60+000 9<+000 60+000 10+000 F0+000 E1HH+100 1+210 E290+310 E3H0+100 1+<1< EF0+<9< E133+000 1+000 ;E130+960= E3<1+000 611 ;E93+211= E10F+000 ;2<6= ;E190+6<6= 100+000 E619+000 ;2+H93= ;E131+H93= 7ebr'ary E119+1<0 EH1+100 1<+000 <6+000 9<+000 60+000 10+000 -ar#h E301+010 E63+000 10+000 1<+000 9<+000 60+000 10+000 90+000 April E260+1H< E69+000 <0+000 10+000 9<+000 60+000 10+000 -ay E21H+600 E93+000 H0+000 <0+000 9<+000 60+000 10+000 D'ne E21H+000 E111+000 F0+000 H0+000 9<+000 60+000 10+000 90+000

Colle#tions Pay(entsC P'r#hases 2abor 2 (os prior to sale 1 (o prior to sale Aeneral: ad(in e,pense 2ease -is#ellaneo's e,penses "a,es )nterest ;on bonds= @e& e*'ip(ent "otal pay(ents hort0 ter( interest paid or re#eived @et #ash gain ;loss=

))). CA 5 URP2U OR 2OA@ R!.U)R!-!@" Dan'ary 7ebr'ary Cash at start i% no borro&ing is done E1<0+000 EH10+310 C'('lative #ash EH10+310 EF20+90< "arget #ash balan#e 1<0+000 1<0+000 'rpl's #ash or total loans o'tstanding to (aintain target #ash balan#e E290+310 E3H0+90<

-ar#h EF20+90< E6F9+91< 1<0+000 E239+91<

April E6F9+91< E<96+H31 1<0+000 E116+H31

-ay E<96+H31 E106+0H< 1<0+000 ;E13+92<=

D'ne E106+0H< ;E 2F+H1F= 1<0+000 ;E1HF+H1F=

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-OD!2 U ! "his #ase ill'strates the typi#al steps involved in a #ash b'dget analysis. "his ne#essarily involves a n'(ber o% n'(eri#al #al#'lations+ so(e o% &hi#h are repetitive 9b'sy &or89. 7or that reason+ &e s'ggest that so(e %or( o% the partial (odel be provided to st'dents i% #o(p'ter %a#ilities are available. ?eyond the *'estions provided in the #ase+ st'dents #o'ld be re*'ired to develop e,tensive 9&hat0i%9 analyses. "he #al#'lations are trivially easy &hen the (odel is 'sed+ b't terribly ti(e #ons'(ing i% done by hand. "his per(its the st'dents ;1= to see the e,tre(e 'se%'lness o% (odels and ;2= to get so(e 'se%'l insights into #ash b'dgeting per se. ./ESTIONS AN" ANSWE S %. Constr'#t a (onthly #ash b'dget %or "oy /orld %or the period Dan'ary thro'gh D'ne 1996. 7or p'rposes o% this *'estion+ disregard both interest pay(ents on short0ter( ban8 loans and interest re#eived %ro( investing s'rpl's %'nds. Also+ ass'(e that all #ash %lo&s o##'r on the 1<th o% ea#h (onth. 7inally+ note that #olle#tions %ro( sales in @ove(ber and De#e(ber o% 199< &ill not be #o(pleted 'ntil Dan'ary and 7ebr'ary o% 1996+ respe#tively. ;5intC Use "able 1 as a g'ide.= )% yo' have a##ess to the spreadsheet (odel+ #o(plete it to generate the re*'ired n'(bers. /hat is the (a,i('( %'nds short%all d'ring the 60(onth planning periodI Ans0er& @et #ash gains are pro>e#ted %or the Dan'ary and 7ebr'ary+ re%le#ting the e%%e#t o% the high &inter holiday sales. "he (a,i('( %'nds re*'ire(ent is E1F0+03< in D'ne. 2. Ass'(e that the ban8 &ill give "oy /orld a E<00+000 line o% #redit. /ill this be s'%%i#ient to #over all e,pe#ted #ash short%allsI 'ppose the ban8 re%'sed to grant the loan+ and th's the #o(pany had to obtain short0ter( %inan#ing %ro( other so'r#es. /hat other so'r#es (ight be availableI Ans0er& A##ording to the pro>e#tions th's %ar+ "oy /orldJs E<00+000 line o% #redit sho'ld be s'%%i#ient to #over its anti#ipated #ash needs. ; ee the 'rpl's #ash or loans o'tstanding line o% "able 1.= 5o&ever+ the line o% #redit has only a 1 per#ent (argin o% sa%ety above D'neJs pea8 need. "here is no reason to thin8 that the ban8 &ill not a##o((odate "oy /orld+ b't i% alternative %inan#ing is re*'ired+ "oy /orld &o'ld have a n'(ber o% alternatives. 7irst+ it (ight negotiate to red'#e its #ash balan#e+ &hi#h &o'ld lo&er the loan re*'ire(ent. Also+ it (ight start paying its s'ppliers (ore slo&ly+ th's 9stret#hing9 its trade #reditK this &o'ld be parti#'larly %easible i% the #o(pany is #'rrently ta8ing dis#o'nts. 7a#toring or pledging a##o'nts re#eivable+ or pledging inventories+ &o'ld also be &orth #onsidering. Co((er#ial paper (ight also be 'sed+ b't that (ay not be %easible given the si$e o% the #o(pany and the %a#t that the ability to obtain ban8 #redit is a prere*'isite to a##essing the #o((er#ial paper (ar8et. )% &orse #a(e to &orse+

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the #o(pany (ight sell #o((on sto#8 to strengthen its %inan#ial position and i(prove its #han#es o% obtaining #redit. till+ given the %a#ts as set %orth in the #ase+ the ban8 &o'ld probably grant the re*'ested #redit. 3. "he (onthly #ash b'dget yo' have prepared ass'(es that all #ash %lo&s o##'r on the 1<th o% ea#h (onth. 'ppose "oy /orldLs o't%lo&s tend to #l'ster at the beginning o% the (onth+ &hile #olle#tions tend to be heaviest to&ard the end o% ea#h (onth. 5o& &o'ld this a%%e#t the validity o% the (onthly b'dgetI /hat #o'ld be done to #orre#t any ina##'ra#ies that (ight res'lt %ro( the (is(at#h o% in%lo&s and o't%lo&sI Ans0er& )n a sit'ation &here #ash in%lo&s and o't%lo&s do not o##'r at the sa(e rate thro'gho't the (onth+ a (onthly #ash b'dget does not a##'rately predi#t %inan#ing re*'ire(ents. "a8e this si(ple e,a(ple as an ill'strationC A ne&ly %or(ed %ir( ('st pay E10+000 o% total e,penses on -ar#h 1+ and it &ill #olle#t E20+000 in total re#eipts on -ar#h 30. A (onthly #ash b'dget &o'ld sho& that no ban8 loan &o'ld be re*'ired+ be#a'se an e,#ess o% E10+000 in #ash &ill o##'r d'ring -ar#h. 5o&ever+ it is obvio's that there &ill be no -ar#h #olle#tions to pay the bills d'e on the %irst o% the (onth. )% "oy /orldJs #olle#tions &ere #l'stered at the end o% the (onth+ &hile its o't%lo&s &ere heaviest at the beginning+ its (onthly #ash b'dget &o'ld 'nderstate its need %or %'nds. "h's+ it is possible that (onthly b'dgets #an be de#eiving. 7or this reason+ (onthly #ash b'dgets are generally 'sed %or planning p'rposes+ b't a daily #ash b'dget is 'sed %or a#t'al #ash #ontrol )% "oy /orldJs #ash %lo&s %it the s#enario depi#ted above+ then a daily #ash b'dget &o'ld be absol'tely essential to ens're that the ne#essary #ash is on hand and that loan #o((it(ents are ade*'ate to (eet a#t'al needs. /e develop a daily #ash b'dget in the ne,t *'estion. 1. @o& ass'(e that yo' and Ara#e de#ide to develop a daily #ash b'dget %or the (onth o% Dan'ary+ 'sing "able 2 as a g'ide. )% yo' #al#'lated the (onthly #ash b'dget as #alled %or in .'estion 1 #orre#tly+ yo' sho'ld have %o'nd a #ash s'rpl's o% E2F9+100 in Dan'ary. Does the daily #ash b'dget agree &ith this #on#l'sionI Ans0er& "he daily #ash b'dget is s'((ari$ed in "able 2. 5ere are so(e inp'ts 'sed in developing the daily b'dgetC Dan'aryJs daily sales M E<00+000:31 days M E16+129. Dis#o'nt ales Re#eipts d'ring Dan'ary 101< %ro( De#e(ber sales M ;E92<+000:31=;0.3<=;0.9F= M E10+23< per day. Dis#o'nt ales Re#eipts %or Dan'ary 16031 M ;E<00+000:31=;0.3<=;0.9F= M E<+<32 per day.

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9@et 309 ales Re#eipts %ro( De#e(ber ales M ;E92<+000:31=;0.60= M E1H+903 per day %or Dan'ary 1030. 9@et 309 ales Re#eipts %ro( Dan'ary ales M ;E<00+000:31=;0.60= M E9+6HH on Dan'ary 31. 2ate ales Re#eipts %ro( @ove(ber ales M ;EF00+000:30=;0.0<= M E1+333 per day %or Dan'ary 1029. 2ate ales Re#eipts %ro( De#e(ber ales M ;E92<+000:31=;0.0<= M E1+192 on Dan'ary 30031. Daily "otal Re#eiptsC Dan'ary 101< Dan'ary 16029 Dan'ary 30 Dan'ary 31 M E10+23< N E1H+903 N E1+333 M E29+1H1. M E<+<32 N E1H+903 N E1+333 M E21+H69. M E<+<32 N E1H+903 N E1+192 M E21+92H. M E<+<32 N E9+6HH N E1+192 M E16+H02.

?ased on the #ash b'dget sho&n in "able 2+ &e see that a loan o% E13H+319 &ill be re*'ired on Dan'ary 1 vers's the s'rpl's o% E2F9+100 sho&n on the (onthly #ash b'dget. "his res'lt o##'rs be#a'se #ash o't%lo&s o##'r pri(arily on the 1st and the 1<th+ &hereas in%lo&s o##'r 'ni%or(ly d'ring the (onth. ?y the end o% the (onth+ the s'rpl's balan#e &ill be 'p to E3<2+902. ;Note& "he di%%eren#e bet&een the E3<2+902 end0o%0(onth s'rpl's in the daily b'dget and the E2F9+100 in the (onthly b'dget res'lts %ro( the ass'(ption+ in the daily b'dget+ that #olle#tions o% dis#o'nt sales are %ro( De#e(ber sales+ not Dan'ary sales+ d'ring the %irst 1< days+ and also be#a'se #olle#tions o% net sales and late sales on Dan'ary 31 are %ro( Dan'ary sales and De#e(ber sales+ respe#tively.= 2. "hin8 abo't the (e#hani#s o% the ban8 loan. D'ring a typi#al (onth+ the %'nds needed or #ash s'rpl's &o'ld be #hanging daily. As ban8s typi#ally operate+ #o'ld the #o(pany in#rease or de#rease its loan on a daily basisI /o'ld the #o(pany &ant to do so i% it #o'ldI Ans0er& @or(ally+ #o(panies 'se 9revolving #redit lines9 &hi#h per(it the( to borro& or repay loans on a daily basis+ so the loan balan#e #o'ld and &o'ld in#rease or de#rease daily. 7'rther+ interest is #harged on a daily basis+ on the balan#e at the #lose o% the b'siness day. "here%ore+ it pays a #o(pany to 'se e,#ess #ash %lo&s to pay do&n loans+ ass'(ing the #ost o% the loan e,#eeds the rate earned on (ar8etable se#'rities. )% a #o(pany #o'ld not #hange its loan balan#e daily+ then it &ill have to obtain a loan at the beginning o% ea#h (onth s'%%i#iently large to #over its e,pe#ted pea8 #ash re*'ire(ents.

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3.

4o' are a&are that Dan is #on#erned abo't the e%%i#ient 'tili$ation o% his %ir(Ls #ash reso'r#es. pe#i%i#ally+ he has *'estioned &hether or not seasonal variations sho'ld be in#orporated into the target balan#e. "hat &o'ld (ean that d'ring (onths &hen #ash needs are greatest+ the target balan#e &o'ld be so(e&hat higher+ &hile the target &o'ld be set at a lo&er level d'ring sla#8 (onths. /o'ld yo' re#o((end that "oy /orld %ollo& this strategyI )% the %ir( had #o(pensating balan#e re*'ire(ents+ &o'ld this a%%e#t yo'r ans&erI 5o& &o'ld a variable target balan#e be in#orporated into the (onthly #ash b'dgetI 5o& &o'ld it be in#orporated into the daily #ash b'dgetI Ans0er& D'ring the (onths o% heavy sales and prod'#tion+ &hen #ash needs are greatest+ "oy /orld &o'ld need a larger target #ash balan#e+ hen#e (ore %inan#ing %ro( the ban8 or other so'r#es. 5o&ever+ d'ring slo&er (onths+ "oy /orldJs lo&er target balan#e &o'ld %ree 'p #ash %or invest(ent in short0ter( earning assets. Under the #'rrent loan ter(s+ #o(pensating balan#e re*'ire(ents &o'ld #onstrain "oy /orldJs a#tions+ be#a'se the #o(pany &o'ld not be able to red'#e its #ash a##o'nt belo& the pres#ribed (ini('(. "his is a point that #o'ld and sho'ld be negotiated &ith the ban8. )n todayJs ban8ing #li(ate+ the ban8 &o'ld probably rela, this #onstraint. A variable #ash balan#e d'ring the (onth &o'ld appear to be a &ise poli#y. On pea8 o't%lo& days+ s'#h as >'st be%ore paydays+ interest pay(ent dates+ and ta, dates+ #ash #o'ld be trans%erred %ro( an interest0bearing a##o'nt into the #o(panyJs #he#8ing a##o'nt to (eet daily #ash needs. Alternatively+ the #o(pany #o'ld ta8e do&n (ore o% its #redit line on days &hen it &as &riting lots o% #he#8s ;or e,pe#ting #he#8s to #lear=. A#t'ally+ the #o(pany probably o'ght to see >'st ho& #lose to $ero it #o'ld 8eep its #ash balan#e+ and then have a line o% #redit &hi#h per(itted *'i#8 #ash in%'sions as needed. till+ the (a,i('( line o% #redit ('st be %ore#asted.

4.

"he only re#eipts sho&n in "oy /orldLs #ash b'dget are #olle#tions. /hat are so(e other types o% in%lo&s that (ight o##'rI Also+ the b'dget ignored short0 ter( interest e,penses and in#o(e. )% the #o(pany paid interest at a rate o% H per#ent ann'ally on the short0ter( ban8 loan and re#eived < per#ent ann'al interest on s'rpl's #ash+ ho& #o'ld these ite(s be in#orporated into the #ash b'dgetI Ans0er& )n (ost %ir(s+ the (a>ority o% the #ash in%lo&s are #olle#tions on sales. 5o&ever+ other in%lo&s do o##'r. )n "oy /orldJs #ase+ in those (onths &here the #ash balan#e is greater than E1<0+000+ s'rpl's #ash sho'ld be invested+ and interest in#o(e th's be earned. Other #ash in%lo&s #o'ld arise %ro( the sale o% sto#8s and bonds+ the sale o% %i,ed assets+ the e,er#ising o% &arrants+ the settle(ent o% la&s'its+ and so on. All o% these ite(s+ as &ell as any e,penses that &ere overloo8ed earlier+ #an be easily in#orporated into the b'dget. )% yo' 8no& the

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ti(ing and a(o'nt o% the #ash %lo&s+ then e,tra lines #an be inserted into the already #onstr'#ted b'dget to ta8e the( into a##o'nt. 7or e,a(ple+ interest re#eived on short0ter( invest(ents in any (onth &o'ld be the (onthly interest rate ti(es the average s'rpl's #ash d'ring the (onth+ and interest paid on short0 ter( borro&ing #o'ld be %ig'red si(ilarly. /ith the spreadsheet (odel+ &e #o'ld add a label 9 hort0ter( interest paid or re#eived9 in Cell A91. /e #o'ld then 'se O)7 state(ents to enter val'es on that line depending on &hether the #o(pany sho&s a #ash de%i#it or s'rpl's d'ring the period. "hese are the re*'ired state(entsC Cell A91 !91 !91 !nter hort0ter( interest paid or re#eived O)7;!10HP0+0.0H:12Q!10H+0.0<:12Q!10H= :C RS791.B91 RS

5ere+ !10H #ontains the s'rpl's #ash or loans o'tstandingK 0.0H M HG is the ass'(ed ann'al rate paid on o'tstanding loansK 0.0< M <G is the ass'(ed ann'al rate earned on s'rpl's #ash. O% #o'rse+ the interest earned or paid is only an appro,i(ation+ be#a'se this approa#h ass'(es that the end0o%0(onth e,#ess or borro&ing &as o'tstanding d'ring the entire (onth. "he addition o% the short0 ter( interest ter( a%%e#ts the periodJs s'rpl's or de%i#it+ so CIRC &ill appear on the s#reen+ indi#ating the %eedba#8 e%%e#ts. ?y pressing the 79 ;re#al#'lation= 8ey a %e& ti(es+ the (odel &ill #o(plete eno'gh iterations to prod'#e the #orre#t %ig'res %or loans o'tstanding and s'rpl's #ash ;see "able 3=. 5. ?e#a'se #ash is a nonearning asset+ "oy /orldLs #ash (anage(ent poli#y is to invest any s'rpl's %'nds in (ar8etable se#'rities. Can yo' s'ggest an invest(ent poli#y that &o'ld provide li*'idity and sa%ety+ yet o%%er the %ir( a reasonable ret'rn on its (ar8etable se#'rities invest(entI pe#i%i#ally+ des#ribe the types o% se#'rities+ the desired (at'rities+ the e,pe#ted ret'rns+ and the ris8s that &o'ld be involved. /o'ld yo'r s'ggestions be the sa(e %or a #o(pany &hose #ash balan#es &ere pro>e#ted to be in the (illions o% dollars as opposed to "oy /orldLs tho'sandsI /o'ld it (atter i% the %ore#asts sho&ed #ash s'rpl'ses %or all %'t're (onths+ going o't inde%initely+ vers's a sit'ation in &hi#h s'rpl'ses and de%i#its alternated %ro( (onth to (onth d'e to seasonal %a#torsI Ans0er& "oy /orld sho'ld invest in short0ter(+ lo&0ris8+ highly li*'id instr'(ents s'#h as U. . "reas'ry bills and ban8 #erti%i#ates o% deposit ;CDs=. PTA+ Orange Co'nty+ and so(e other organi$ations have invested in derivatives+ see8ing a so(e&hat higher yield than traditional se#'rities earned. "his proved to be disastro's+ and a%ter those e,perien#es+ (ost #orporations and govern(ent 'nits have banned the 'se o% derivatives %or invest(ent ;as opposed to hedging= p'rposes. ?e#a'se the a(o'nt o% %'nds involved here is not large in relative ter(s+ a (oney (ar8et ('t'al %'nd (ight be the best #hoi#e. Other&ise+ short0ter( se#'rities

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#o'ld be p'r#hased &ith (at'rities that (at#h anti#ipated #ash needs. 2arger %ir(s that #an e#ono(i#ally >'sti%y their o&n #ash (anage(ent personnel typi#ally 'se the sa(e sele#tion #riteria ;li*'idity and sa%ety+ and the highest ret'rn that is #onsistent &ith those #riteria=+ and they invest in the sa(e types o% se#'rities+ b't dire#tly rather than thro'gh a ('t'al %'nd inter(ediary. Another se#'rity that has be#o(e pop'lar in re#ent years is %loating rate pre%erred sto#8+ &hi#h #an be p'r#hased individ'ally or thro'gh ('t'al %'nds established %or this p'rpose. ?e#a'se the sto#8 o%%ers a %loating dividend rate+ its pri#e re(ains at or near par+ so there is little interest rate ris8. 7'rther+ sin#e only a %ra#tion o% the dividends are ta,able to #orporate investors+ the a%ter0ta, yield on s'#h sto#8s is generally higher than on the traditional (oney (ar8et instr'(ents. )% a %ir(Js #ash %lo&s are in the tho'sands rather than in the (illions+ the invest(ent o% e,#ess #ash &o'ld still be bene%i#ial+ b't not as #riti#al. )ndeed+ %or very s(all %ir(s it is even possible that the ret'rns &o'ld be ins'%%i#ient to re#over the #osts o% transa#tions. 5ere a (oney (ar8et a##o'nt &o'ld be the pre%erred alternative. )% the s'rpl'ses are %ore#asted to #ontin'e inde%initely+ li*'idity be#o(es less o% an iss'e+ and the %ir( sho'ld #onsider per(anent 'ses o% the #ash %lo&s+ in#l'ding share rep'r#hases+ higher dividends+ repay(ent o% long0ter( debt+ (erger a#tivity+ and the li8e. 2onger ter( invest(ents typi#ally yield (ore than shorter ter( invest(ents+ and this %a#t sho'ld be #onsidered. 6. "he #ash b'dget is a %ore#ast+ hen#e (any o% the #ash %lo&s sho&n are e,pe#ted val'es rather than a(o'nts 8no&n &ith #ertainty. )% a#t'al sales+ hen#e #olle#tions+ are di%%erent %ro( the %ore#asted levels+ then the %ore#asted s'rpl'ses and de%i#its &ill be in#orre#t. 4o' 8no& that Dan and Ara#e &ill be interested in 8no&ing ho& vario's #hanges in the 8ey ass'(ptions &o'ld a%%e#t the %'nds s'rpl's or de%i#it. 7or e,a(ple+ i% sales %ell belo& the %ore#asted level+ &hat e%%e#t &o'ld that haveI )t &o'ld be parti#'larly bad to have a E<00+000 line o% #redit and then %ind that d'e to in#orre#t ass'(ptions the a#t'al #ash re*'ire(ent &as EH00+000U /ith this in (ind+ ans&er the %ollo&ing *'estions. )% yo' are 'sing the spreadsheet (odel+ *'anti%y yo'r ans&ers. Other&ise+ >'st dis#'ss the li8ely e%%e#ts o% the indi#ated #hanges. )n either sit'ation+ indi#ate &hat sort o% #ontingen#y plans the #o(pany sho'ld (a8e to prepare %or the types o% event'alities noted. )n this dis#'ssion+ re#ogni$e that getting a line o% #redit is not &itho't #ost. /hat &o'ld be the i(pa#t on the (onthly net #ash %lo&s %ro( Dan'ary to D'ne 1996 i% a#t'al sales &ere 20 per#ent belo& the %ore#asted a(o'ntsI ;)n yo'r ans&er+ ass'(e that a#t'al sales %or @ove(ber and De#e(ber 199< are 20 per#ent belo& the %ore#asted level. Also+ ass'(e that p'r#hases and labor+ as &ell as all other e,penses+ are set by #ontra#t at the start o% the 60(onth %ore#ast period on the basis o% the original e,pe#ted sales+ so the o't%lo&s #annot be ad>'sted

a.)

Toy World Page 21<

do&n&ard d'ring the planning period even tho'gh sales de#line belo& the %ore#asted levels.= $.) /hat i% a#t'al sales &ere only <0 per#ent o% the %ore#asted levelI "o ans&er this *'estion+ again ass'(e that all e,penses are based on the e,pe#ted level o% sales+ not the reali$ed level. 'ppose #'sto(ers #hanged their pay(ent patterns and began paying as %ollo&sC 2< per0#ent in the (onth o% sale+ << per#ent in the %ollo&ing (onth+ and 20 per#ent in the se#ond (onth vers's the old 3<0600< pattern. @o& ho& large a #redit line &o'ld the #o(pany re*'ireI Ans0er& ensitivity analysis is e,tre(ely i(portant &hen 'sing a #ash b'dget %or planning p'rposes. 7'rther+ s'#h analysis is terribly di%%i#'lt i% done by hand+ yet very easy i% a spreadsheet (odel is e(ployed. a.) "he %ollo&ing pro>e#tions indi#ate that i% the sales %ore#asts t'rn o't to be overly opti(isti#+ additional %inan#ing &ill be re*'ired. "his res'lt o##'rs be#a'se &e ass'(ed that prod'#tion and overhead #osts are %i,ed00they &ere set on the basis o% e,pe#ted sales rather than on the basis o% reali$ed sales. )% the #o(pany &ere able to ad>'st its prod'#tion s#hed'les to instantly re%le#t belo&0 %ore#ast sales levels+ the %'nd re*'ire(ents &o'ld be lo&er. )ndeed+ i% the %ir( %ore#asted a de#lining level o% sales+ then it #o'ld probably dra& do&n inventories and th's generate #ash in e,#ess o% the originally %ore#asted level. "he (ain p'rpose o% this *'estion is to sho& the i(portan#e o% the sales %ore#ast+ and also the i(portan#e o% ad>'sting prod'#tion to a#t'al sales. /e obtained the %ollo&ing res'lts 'sing the spreadsheet (odel. ales de#rease 20G @et Cash 7lo& E13<+F00 ;10+HF0= ;192+16F= ;11<+F60= ;233+920= ;1H<+100= C'('lative ;2oan= or 'rpl's Dan'ary 7ebr'ary -ar#h April -ay E13<+F00 12<+020 ;6H+11F= ;213+00F= ;116+92F= Original ales @et Cash 7lo& E2F9+100 H9+0<0 ;131+960= ;93+F2<= ;190+100= ;132+000= C'('lative ;2oan= or 'rpl's E2F9+100 36F+1<0 236+190 112+36< ;1F+03<=

c.)

Dan'ary 7ebr'ary -ar#h April -ay D'ne

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D'ne ;922+32F= ;1F0+03<= As sho&n above+ i% sales are 20 per#ent belo& the original %ore#ast+ the #'('lative loan re*'ire(ents in the (onth o% D'ne is &ell above the E<00+000 line o% #redit available to "oy /orld. @ote also that the #ash b'dget represents a %ore#ast+ so all the val'es in the b'dget are e,pe#ted val'es. )% the 'nderlying probability distrib'tion &as available+ then a -onte Carlo si('lation #o'ld be 'sed to set the target #ash balan#e %or ea#h (onth %ro( Dan'ary to D'ne. /e #o'ld then ens're+ &ithin so(e stated #on%iden#e level+ that the #ash holdings &o'ld be s'%%i#ient. $.) "he %ollo&ing table sho&s the sit'ation i% a#t'al sales are <0 per#ent belo& the %ore#asted levelC @et Cash C'('lative 7lo& 'rpl's ;2oan= Dan'ary ;E91+1<0= ;E91+1<0= 7ebr'ary ;11<+<2<= ;239+6H<= -ar#h ;2F2+1F0= ;<22+1<<= April ;223+913= ;H16+06F= -ay ;299+200= ;1+01<+26F= D'ne ;<10+<00= ;1+<F<+H6F= )n this #ase+ the E<00+000 line o% #redit &o'ld not be s'%%i#ient in the (onths o% -ar#h+ April+ -ay+ and D'ne. )n %a#t+ %ro( April to D'ne+ the de%i#it &o'ld %ar e,#eed the line o% #redit. c.) "he %ollo&ing tab'lation sho&s ho& the #hange in the pay(ent pattern &o'ld a%%e#t the re*'ired loanC @et Cash C'('lative 7lo& 'rpl's ;2oan= Dan'ary E313+F<0 E313+F<0 7ebr'ary 163+100 1HH+2<0 -ar#h ;99+100= 3HH+F<0 April ;F1+FH<= 292+9H< -ay ;1H9+2<0= 113+H2< D'ne ;132+H<0= ;319+02<= in#e "oy /orldJs sales are seasonal+ &ith high sales in the early and later (onths o% the si,0(onth b'dgeting hori$on+ the slo&er #ash #olle#tion pattern has the e%%e#t o% evening o't the #ash s'rpl's:de%i#it. "he ;delayed= #ash re#eipts %ro( the high sales (onths o##'r in (onths &ith lo&er sales. %7. ?ased on all o% yo'r analysis+ ho& large a #redit line &o'ld yo' re#o((end that Dan see8 %ro( the ban8I Ans0er&

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"he ans&er here depends on (anage(entJs toleran#e %or ris8 and its vie& o% the a##'ra#y o% its %ore#asts. Clearly+ a line o% at least E<00+000 is re*'ired+ and pr'den#e &o'ld s'ggest (ore. "he 1.< per#ent #o((it(ent %ee &o'ld (ean a #ost o% E1+<00 per year per E100+000 o% 'n'sed line. "his E1+<00 #an be tho'ght o% as an ins'ran#e pre(i'( against the #han#e that the %ore#ast &ill not be reali$ed. )% the %ore#ast is tho'ght to be *'ite a##'rate+ then it &o'ld probably not be &orth it to get a line over abo't E600+000. 5o&ever+ the toy b'siness is 'npredi#table+ hen#e a sa%ety (argin &o'ld probably be a good idea. "hat &o'ld s'ggest a larger line+ say EH<0+000. O% #o'rse+ i% the #o(pany #an negotiate and get the E1<0+000 #o(pensating balan#e red'#ed+ this &o'ld red'#e the #ash re*'ired and th's the #redit line re*'ire(ents. Also+ i% the #o((it(ent %ee &ere raised or lo&ered+ that too &o'ld a%%e#t the de#ision. )n s'((ary+ based on the in%or(ation at hand+ &e &o'ld re#o((end that the #o(pany see8 a #redit line in the range o% E600+000 to EF00+000+ and also that it see8 (ore %le,ibility in its #o(pensating balan#e re*'ire(ent. %%. Dan C'lbreth has been thin8ing abo't possibly #hanging prod'#tion pro#ed'res so as to level o't prod'#tion d'ring the year. "his &o'ld stabili$e the labor %or#e and probably lo&er per 'nit #osts. Can yo' thin8 o% any possible negative e%%e#ts o% s'#h a #hange+ and &o'ld a prod'#tion pro#ess #hange a%%e#t #ash re*'ire(entsI Ans0er& "he #o(pany &o'ld have to start prod'#tion early in the year to b'ild 'p prod'#t %or the pea8 sales. "his early prod'#tion &o'ld have to be %inan#ed+ #osts &o'ld be in#'rred early+ sales and #olle#tions &o'ld %ollo& ('#h later. )% the %'nds &ere to be borro&ed+ the #redit line &o'ld be ('#h larger than &hat &e have dis#'ssed th's %ar. Another dra&ba#8 to leveling o't prod'#tion is that toy sales are so(e&hat 'npredi#table+ so it is better to &ait %or orders be%ore prod'#ing. )t &o'ld be a big (ista8e to prod'#e a lot o% a parti#'lar type o% toy ba#8 in the spring and then have 8ids t'rn a&ay %ro( that toy &ith yo'r &areho'se %'ll o% the(. Cole#o &ent ban8r'pt be#a'se it prod'#ed too (any Cabbage Pat#h dolls >'st as they &ere going o't o% %ashion.