Page 190 - DMGT409Basic Financial Management

Unit 11: Cash Management

Notes
Table 1: Actual and Forecast Sales from Marketing
Month Actual Credit Sales Forecast Sales
November $ 4,338,000
December 5,204,000
January $ 4,600,000
February 4,500,000
March 4,500,000
April 52,00, 000
May 5, 000, 000
June 4,700, 000
July 6, 000, 000
August 6,000,000
September 5,800,000
October 4,500,000
November 4,600,000
December 4,600,000
From the accounting department, Loofer obtained information on the historical mix of

sales and collection information. During the first half of the year, credit sales generally
mad up about 80 per cent of all sales. In the second half, this dropped to 75 per cent.
With 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 fi rm
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 fi rm 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 refl ect 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 Month Collected One Month Later Collected Two
Months Later
November 0.20
December 0.60 0.15
Contd...

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