Assignment
In order to better serve their rural patients, Drs. Joe and Rick Parcells (brothers) began giving safety seminars. Especially popular were their "emergency-preparedness" talks given to farmers. Many people asked whether the "kit" of materials the doctors recommended for common farm emergencies was commercially available.
After checking with several suppliers, the doctors realized that no other company offered the supplies they recommended in their seminars, packaged in the way they described. Their wives, Megan and Sue, agreed to make a test package by ordering supplies from various medical supply companies and assembling them into a "kit" that could be sold at the seminars. When these kits proved a runaway success, the sisters-in-law decided to market them. At the advice of their accountant, they organized this venture as a separate company, called Life Protection Products (LPP), with Megan Parcells as CEO and Sue Parcells as Secretary-Treasurer.
LPP soon started receiving requests for the kits from all over the country, as word spread about their availability. Even without advertising, LPP was able to sell its full inventory every month. However, the company was becoming ?nancially strained. Megan and Sue had about $100,000 in savings, and they invested about half that amount initially. They believed that this venture would allow them to make money. However, at the present time, only about $30,000 of the cash remains, and the company is constantly short of cash.
Megan has come to you for advice. She does not understand why the company is having cash ?ow problems. She and Sue have not even been withdrawing salaries. However, they have rented a local building and have hired two more full-time workers to help them cope with the increasing demand. They do not think they could handle the demand without this additional help.
Megan is also worried that the cash problems mean that the company may not be able to support itself. She has prepared the cash budget shown below. All seminar customers pay for their products in full at the time of purchase. In addition, several large companies have ordered the kits for use by employees who work in remote sites. They have requested credit terms and have been allowed to pay in the month following the sale. These large purchasers amount to about 25% of the sales at the present time. LPP purchases the materials for the kits about 2 months ahead of time. Megan and Sue are considering slowing the growth of the company by simply purchasing less materials, which will mean selling fewer kits.
The workers are paid weekly. Megan and Sue need about $15,000 cash on hand at the beginning of the month to pay for purchases of raw materials. Right now they have been using cash from their savings, but as noted, only $30,000 is left.
Instructions
Write a response to Megan Parcells.
Explain why LPP is short of cash.
Will this company be able to support itself? Explain your answer.
Make any recommendations you deem appropriate.
Life Protection Products
Cash Budget
For the Quarter Ending June 30, 2014 April May June
April May June
Cash balance, beginning $15,000 $15,000 $15,000
Cash received
From prior month sales 5,000 7,500 12,500
From current sales 15,000 22,500 37,500
Total cash on hand 35,000 45,000 65,000
Cash payments
To employees 3,000 3,000 3,000
For products 25,000 35,000 45,000
Miscellaneous expenses 5,000 6,000 7,000
Postage 1,000 1,000 1,000
Total cash payments 34,000 45,000 56,000
Cash balance $???1?,?0?0?0? $????????0?? $??9?,?0?0?0?
Borrow from savings $?1?4?,?0?0?0?? $?1?5?,?0?0?0?? $??1?,?0?0??0??
Borrow from bank? $??????0?? $???????0?? $??5?,?0?0?0??