Page 290 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes respect to the credit sales, collection patterns varied seasonally. This information is contained
in Table 2. Once again, the collection pattern is also seasonal Note, however, that the
collections do not total to 100 per cent of credit sales. This is the case because the firm
allows a margin for bad debts and unexpected collection costs.
The firm follows a unique and highly controlled system for its trade payables. Each month
during the first half of the year, the accounts payable section pays suppliers cash equal to
50 per cent of the monthly sales. During the second half of the year, this rises to 55 per cent.
Over a full year, this pattern of payment seems to be adequate to pay all bills. At times,
suppliers are pressing for more payments and some maneuvering is needed. Still, this
policy assists the firm’s cash management during the busy third quarter and will be
followed next year.
Cash operating expenses are paid as they occur. During the first and fourth quarters, they
are estimated at 50 per cent of sales. During the second and third quarters, they rise to
55 per cent of sales.
Loofer knows that the firm includes the impact of interest and taxes in its operating cash
flow forecasts. The levels of such debt, along with the forecasted average interest rate for
each month, are given in Table 3. Interest will be calculated to reflect changes in debt
levels.
The firm pays estimated tax payments monthly at a 35 per cent rate. It uses a cost of goods
sold estimate at 50 per cent of sales, not including depreciation. Loofer assumes that
monthly depreciation for the next year will be $ 185,000.
Table 2: Collection Pattern of Receivables

Percent of Credit Sales
Months
Collected in Same Collected One Collected Two
Month Month Later Months Later
November 0.20

December 0.60 0.15
January 0.20 0.60 0.15
February 0.30 0.60 0.50
March 0.25 0.60 0.10

April 0.25 0.60 0.10
May 0.15 0.60 0.20
June 0.20 0.60 0.15
July 0.10 0.60 0.25

August 0.20 0.60 0.15
September 0.15 0.60 0.20
October 0.20 0.60 0.15
November 0.15 0.60

December 0.10

Contd...

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