You have recently been hired by Keafer Manufacturing to work in its established treasury

department. Keafer Manufacturing is a small company that produces highly customized

cardboard boxes in a variety of sizes for different purchasers. Adam Keafer, the owner of the
company, works primarily in the sales and production areas of the company. Currently, the
company basically puts all receivables in one pile and all payables in another, and a part-time
bookkeeper periodically comes in and attacks the piles. Because of this disorganized system, the
finance area needs work, and that’s what you’ve been brought in to do. The company currently
has a cash balance of $210,000, and it plans to purchase new machinery in the third quarter at a
cost of $390,000. The purchase of the machinery will be made with cash because of the
discount offered for a cash purchase. Adam wants to maintain a minimum cash balance of
$135,000 to guard against unforeseen contingencies. All of Keafer’s sales to customers and
purchases from suppliers are made with credit, and no discounts are offered or taken.
The company had the following sales each quarter of the year just ended:

.:.
After some research and discussions with customers, you’re projecting that sales will be 8
percent higher in each quarter next year. Sales for the first quarter of the following year are also
expected to grow at 8 percent. You calculate that Keafer currently has an accounts receivable
period of 57 days and an accounts receivable balance of $675,000. However, 10 percent of the
accounts receivable balance is from a company that has just entered bankruptcy, and it is likely
that this portion will never be collected.
You’ve also calculated that Keafer typically orders supplies each quarter in the amount of 50
percent of the next quarter’s projected gross sales, and suppliers are paid in 53 days on average.
Wages, taxes, and other costs run about 25 percent of gross sales. The company has a quarterly
interest payment of $185,000 on its long-term debt. Finally, the company uses a local bank for
its short-term financial needs. It currently pays 1.2 percent per quarter on all short-term
borrowing and maintains a money market account that pays .5 percent per quarter on all short-
term deposits.
Adam 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.
1. Use the numbers given to complete the cash budget and short-term financial plan.
2. Rework the cash budget and short-term financial plan assuming Keafer changes to a
minimum cash balance of $90,000.
3. Rework the sales budget assuming an 11 percent growth rate in sales and a 5 percent growth
rate in sales. Assume a $135,000 target cash balance.
4. Assuming the company maintains its target cash balance at $135,000, what sales growth rate
would result in a zero need for short-term financing? To answer this question, you may need to
set up a spreadsheet and use the “Solver” function.

SOLUTION

1. The cash flow each quarter will consist of the sales collection, minus the suppliers paid,
expenses, dividends, interest, and capital outlays. The cash flows for each quarter will be:

Cash Flow
Q1 Q2 Q3 Q4
Collections from previous quarter $607,500.00 $753,768.00 $780,444.00 $769,500.00
Collections from current quarter
sales 436,392.00 451,836.00 445,500.00 420,948.00
Payments to suppliers for
previous quarter –350,436.00 –362,838.00 –357,750.00 –338,034.00
Payments to suppliers for current
quarter –253,302.00 –249,750.00 –235,986.00 –264,215.52
Expenses –297,540.00 –308,070.00 –303,750.00 –287,010.00
Dividends and interest –185,000.00 –185,000.00 –185,000.00 –185,000.00
Outlay –390,000.00
Net cash flow –$42,386.00 $99,946.00 –$246,542.00 $116,188.48

Cash Balance
Q1 Q2 Q3 Q4
Beginning cash balance $210,000.00 $167,614.00 $267,560.00 $21,018.00
Net cash inflow –42,386.00 99,946.00 –246,542.00 116,188.48
Ending cash balance $167,614.00 $267,560.00 $21,018.00 $137,206.48
Minimum cash balance 135,000.00 135,000.00 135,000.00 135,000.00
Cumulative surplus –deficit $32,614.00 $132,560.00 –$113,982.00 $2,206.48

The short-term financial plan looks like this:

Short-term Financial Plan

Target cash balance $135,000.00 $135,000.00 $135,000.00 $135,000.00
Net cash inflow –42,386.00 99,946.00 –246,542.00 116,188.48
New short-term investments 0 –100,321.00 0 –44,999.95
Income on short-term investments 375.00 375.00 876.61 0
Short-term investments sold 42,011.00 0 175,321.00 0
New short-term borrowing 0 0 70,344.40 0
Interest on short-term borrowing 0 0 0 –844.13
Short-term borrowing repaid 0 0 0 –70,344.40
Ending cash balance $135,000.00 $135,000.00 $135,000.00 $135,000.00
Minimum cash balance –135,000.00 –135,000.00 –135,000.00 –135,000.00
Cumulative surplus –deficit $0 $0 $0 $0

Beginning short-term investments $75,000.00 $75,000.00 $175,321.00 $0

Ending short-term investments 75,000.00 175,321.00 0 44,999.95
Beginning short-term debt 0 0 0 70,344.40
Ending short-term debt $0 $0 $70,344.40 $0

The interest calculations for each quarter and the net cash cost are:

Q1: Excess funds at start of quarter of $75,000.00 earns $375.00 inincome.

Q2: Excess funds at start of quarter of $75,000.00 earns $375.00 inincome.
Q3: Excess funds at start of quarter of $175,321.00 earns $876.61 inincome.
Q4: Shortage of funds at start of quarter of $70,344.40 costs $844.13 ininterest.

Net cash cost

Q1 $375.00
Q2 375.00
Q3 876.61
Q4 844.13
Cash generated by short-term financing $782.47

2. If Keafer reduces its target cash balance to $90,000, the cash flows each quarter will remain
the same, so they will not be repeated here. The cash balance and short-term financial plan
will be:
 Cash Balance
Q1 Q2 Q3 Q4
Beginning cash
balance $210,000.00 $167,614.00 $267,560.00 $21,018.00
Net cash inflow –42,386.00 99,946.00 –246,542.00 116,188.48
Ending cash
balance $167,614.00 $267,560.00 $21,018.00 $137,206.48
Minimum cash
balance 90,000.00 90,000.00 90,000.00 90,000.00
Cumulative
surplus –deficit $77,614.00 $177,560.00 –$68,982.00 $47,206.48

Short-term Financial Plan

Target cash
balance $90,000.00 $90,000.00 $90,000.00 $90,000.00
Net cash inflow –42,386.00 99,946.00 –246,542.00 116,188.48
New short-term
investments 0 –100,546.00 0 –90,996.49
Income on
short-term
investments 600.00 600.00 1,102.73 0
Short-term
investments
sold 41,786.00 0 220,546.00 0
New short-term
borrowing 0 0 24,893.27 0
Interest on
short-term
borrowing 0 0 0 –298.72
Short-term
borrowing
repaid 0 0 0 –24,893.27
Ending cash
balance $90,000.00 $90,000.00 $90,000.00 $90,000.00
Minimum cash
balance –90,000.00 –90,000.00 –90,000.00 –90,000.00
Cumulative
surplus –deficit $0 $0 $0 $0
Beginning
short-term
investments $120,000.00 $120,000.00 $220,546.00 $0
Ending short-
term
investments 120,000.00 220,546.00 0 90,996.49
Beginning
short-term debt 0 0 0 24,893.27
Ending short-
term debt $0 $0 $24,893.27 $0

Q1
: Excess funds at start of quarter of $120,000.00 earns $600.00 in income.
Q2
: Excess funds at start of quarter of $120,000.00 earns $600.00 in income.
Q3
: Excess funds at start of quarter of $220,546.00 earns $1,102.73 in income.
Q4
: Shortage of funds at start of quarter of $24,893.27 costs $298.72 in interest.

Net cash cost

Q1 $600.00
Q2 600.00
Q3 1,102.73
Q4 298.72
Cash generated
by short-term
financing $2,004.01

3. If the sales growth rate is 11 percent, the cash flows for each quarter will be:

Cash Flow
Q1 Q2 Q3 Q4
Collections from previous quarter $607,500.00 $774,706.00 $802,123.00 $790,875.00
Collections from current quarter
sales 448,514.00 464,387.00 457,875.00 432,641.00
Payments to suppliers for
previous quarter –360,170.33 –372,916.83 –367,687.50 –347,423.83
Payments to suppliers for current
quarter –260,338.17 –256,687.50 –242,541.17 –279,098.03
Expenses –305,805.00 –316,627.50 –312,187.50 –294,982.50
Dividends and interest –185,000.00 –185,000.00 –185,000.00 –185,000.00
Outlay –390,000.00
Net cash flow –$55,299.50 $107,861.17 –$237,418.17 $117,011.64

Cash Balance
Q1 Q2 Q3 Q4
Beginning cash balance $210,000.00 $154,700.50 $262,561.67 $25,143.50
Net cash inflow –55,299.50 107,861.17 –237,418.17 117,011.64
Ending cash balance $154,700.50 $262,561.67 $25,143.50 $142,155.14
Minimum cash balance 135,000.00 135,000.00 135,000.00 135,000.00
Cumulative surplus –deficit $19,700.50 $127,561.67 –$109,856.50 $7,155.14

The short-term financial plan looks like this:

Short-term Financial Plan

Target cash balance $135,000.00 $135,000.00 $135,000.00 $135,000.00
Net cash inflow –55,299.50 107,861.17 –237,418.17 117,011.64
New short-term investments 0 –108,236.17 0 –63,106.63
Income on short-term investments 375.00 375.00 916.18 0
Short-term investments sold 54,924.50 0 183,236.17 0
New short-term borrowing 0 0 53,265.82 0
Interest on short-term borrowing 0 0 0 –639.19
Short-term borrowing repaid 0 0 0 –53,265.82
Ending cash balance $135,000.00 $135,000.00 $135,000.00 $135,000.00
Minimum cash balance –135,000.00 –135,000.00 –135,000.00 –135,000.00
Cumulative surplus –deficit $0 $0 $0 $0

Beginning short-term investments $75,000.00 $75,000.00 $183,236.17 $0

Ending short-term investments 75,000.00 183,236.17 0 63,106.63
Beginning short-term debt 0 0 0 53,265.82
Ending short-term debt $0 $0 $53,265.82 $0

The interest calculations for each quarter and the net cash cost are:

Q1: Excess funds at start of quarter of $75,000.00 earns $375.00 inincome.

Q2: Excess funds at start of quarter of $75,000.00 earns $375.00 inincome.
Q3: Excess funds at start of quarter of $183,236.17 earns $916.18 inincome.
Q4: Shortage of funds at start of quarter of $53,265.82 costs $639.19 ininterest.
 Net cash cost
Q1 $375.00
Q2 375.00
Q3 916.18
Q4 639.19
Cash generated by short-term financing $1,026.99

If the sales growth rate is 5 percent, the cash flows for each quarter will be:

Cash Flow
Q1 Q2 Q3 Q4
Collections from previous quarter $607,500.00 $732,830.00 $758,765.00 $748,125.00
Collections from current quarter
sales 424,270.00 439,285.00 433,125.00 409,255.00
Payments to suppliers for
previous quarter –340,701.67 –352,759.17 –347,812.50 –328,644.17
Payments to suppliers for current
quarter –246,265.83 –242,812.50 –229,430.83 –249,740.75
Expenses –289,275.00 –299,512.50 –295,312.50 –279,037.50
Dividends and interest –185,000.00 –185,000.00 –185,000.00 –185,000.00
Outlay –390,000.00
Net cash flow –$29,472.50 $92,030.83 –$255,665.83 $114,957.58

Cash Balance
Q1 Q2 Q3 Q4
Beginning cash balance $210,000.00 $180,527.50 $272,558.33 $16,892.50
Net cash inflow –29,472.50 92,030.83 –255,665.83 114,957.58
Ending cash balance $180,527.50 $272,558.33 $16,892.50 $131,850.08
Minimum cash balance 135,000.00 135,000.00 135,000.00 135,000.00
Cumulative surplus –deficit $45,527.50 $137,558.33 –$118,107.50 –$3,149.92

The short-term financial plan looks like this:

Short-term Financial Plan

Target cash balance $135,000.00 $135,000.00 $135,000.00 $135,000.00
Net cash inflow –29,472.50 92,030.83 –255,665.83 114,957.58
New short-term investments 0 –92,405.83 0 –26,485.54
Income on short-term investments 375.00 375.00 837.03 0
Short-term investments sold 29,097.50 0 167,405.83 0
New short-term borrowing 0 0 87,422.97 0
Interest on short-term borrowing 0 0 0 –1,049.08
Short-term borrowing repaid 0 0 0 –87,422.97
Ending cash balance $135,000.00 $135,000.00 $135,000.00 $135,000.00
Minimum cash balance –135,000.00 –135,000.00 –135,000.00 –135,000.00
Cumulative surplus –deficit $0 $0 $0 $0

Beginning short-term investments $75,000.00 $75,000.00 $167,405.83 $0

Ending short-term investments 75,000.00 167,405.83 0 26,485.54
Beginning short-term debt 0 0 0 87,422.97
Ending short-term debt $0 $0 $87,422.97 $0

The interest calculations for each quarter and the net cash cost are:

Q1: Excess funds at start of quarter of $75,000.00 earns $375.00 inincome.

Q2: Excess funds at start of quarter of $75,000.00 earns $375.00 inincome.
Q3: Excess funds at start of quarter of $167,405.83 earns $837.03 inincome.
Q4: Shortage of funds at start of quarter of $87,422.97 costs $1,049.08 ininterest.

Net cash cost

Q1 $375.00
Q2 375.00
Q3 837.03
Q4 –1,049.08
Cash generated by short-term financing $537.95

4. Since the only period in which there is borrowing is the third period, we can set the ending
short-term debt in quarter 3 equal to zero and use Solver. Doing so, we find the necessary
sales growth rate is 21 percent. The short-term financial plan would be:

Cash Flow
Q1 Q2 Q3 Q4
Collections from previous quarter $607,500.00 $844,499.33 $874,386.33 $862,125.00
Collections from current quarter
sales 488,920.67 506,223.67 499,125.00 471,617.67
Payments to suppliers for
previous quarter –392,618.11 –406,512.94 –400,812.50 –378,723.28
Payments to suppliers for current
quarter –283,792.06 –279,812.50 –264,391.72 –331,651.19
Expenses –333,355.00 –345,152.50 –340,312.50 –321,557.50
Dividends and interest –185,000.00 –185,000.00 –185,000.00 –185,000.00
Outlay –390,000.00
Net cash flow –$98,344.50 $134,245.06 –$207,005.39 $116,810.70

Cash Balance
Q1 Q2 Q3 Q4
Beginning cash balance $210,000.00 $111,655.50 $245,900.56 $38,895.17
Net cash inflow –98,344.50 134,245.06 –207,005.39 116,810.70
Ending cash balance $111,655.50 $245,900.56 $38,895.17 $155,705.87
Minimum cash balance 135,000.00 135,000.00 135,000.00 135,000.00
Cumulative surplus –deficit –$23,344.50 $110,900.56 –$96,104.83 $20,705.87

The short-term financial plan looks like this:

Short-term Financial Plan

Target cash balance $135,000.00 $135,000.00 $135,000.00 $135,000.00
Net cash inflow –98,344.50 134,245.06 –207,005.39 116,810.70
New short-term investments 0 –134,620.06 0 –116,829.02
Income on short-term investments 375.00 375.00 1,048.10 18.31
Short-term investments sold 97,969.50 0 205,957.29 0
New short-term borrowing 0 0 0 0
Interest on short-term borrowing 0 0 0 0
Short-term borrowing repaid 0 0 0 0
Ending cash balance $135,000.00 $135,000.00 $135,000.00 $135,000.00
Minimum cash balance –135,000.00 –135,000.00 –135,000.00 –135,000.00
Cumulative surplus –deficit $0 $0 $0 $0

Beginning short-term investments $75,000.00 $75,000.00 $209,620.06 $3,662.77

Ending short-term investments 75,000.00 209,620.06 3,662.77 120,491.78
Beginning short-term debt 0 0 0 0
Ending short-term debt $0 $0 $0 $0

The interest calculations for each quarter and the net cash cost are:

Q1: Excess funds at start of quarter of $75,000.00 earns $375.00 in income.

Q2: Excess funds at start of quarter of $75,000.00 earns $375.00 in income.
Q3: Excess funds at start of quarter of $209,620.06 earns $1,048.10 in income.
Q4: Excess funds at start of quarter of $3,662.77 earns $18.31 in income.

Net cash cost

 Q1 $375.00
Q2 375.00
Q3 1,048.10
Q4 18.31
Cash generated by short-term financing $1,816.41