Case Study 1

The sales forecast for your firm for 2014 is $9.1 million.  The cost of processing (production) is 50% of sales.  Sales and administrative expenses are $100,000 per month.  A close look at the sales forecast shows a strong seasonal pattern.  The strongest sales months are February, March, April, and May.

January            $600,000                               July                         $80,000

February           $1,000,000                           August                   $70,000

March                $2,000,000                           September             $60,000

April                  $3,000,000                          October                  $60,000

May                   $2,000,000                           November             $60,000

June                  $100,000                               December              $70,000

Sales are 50% cash sales and 50% credit sales; 80% of the monthly credit sales is received as cash one month following the month of sale.  The remaining 20% of credit sales is received as cash the second month following the month of sale. 

As a result of computer processing equipment operating lease obligations, the firm's processing costs are uniform throughout the year (annual processing costs are uniformly spread over twelve months).  The firm's cash management policy requires the firm to maintain a minimum cash balance of $200,000.  The firm's board of directors decided that in November 2014 it would pay-out a dividend of $ 500,000.  Taxes of $ 200,000 will be paid per quarter (in March, June, September, and December).  A capital outlay of $750,000 will be made in both March and April.

You have had a running discussion with the Chief Financial Officer (CFO) as to the best way meet anticipated monthly cash shortfalls. The CFO believes in conservative cash management it opts for long-term financing.  This entails financing the firm's cash requirements with an annual long-term loan at 10%, which is based on covering the highest monthly cash shortfall.  The unused portion of acquired funds will be fully invested on a monthly basis at a 6% (annual) interest rate.

You believe a more cost effective approach would be to finance the firm's cash requirements through a revolving credit agreement at a cost of .5% (annual rate) of the monthly-unused portion of the credit line. The used portion of the credit line will cost 5% (annual rate).  Determine who is right. Provide all supporting calculations including the preparation of an annual cash budget.  In addition, provide a detailed explanation of the advantages and disadvantages of each scenario.  Finally, consider additional alternatives not discussed with/by the CEO. Explain in detail why these alternatives should be considered.  This assignment should be 1,000-1,500 words in length and in APA format.