CHAPTER 18
PIEPKORN MANUFACTURING
WORKING CAPITAL MANAGEMENT
1. The cash flow each quarter will consist of the sales collection, minus the suppliers paid, expenses,
dividends, interest, and capital outlays. The individual cash flows are calculated as follows:
Accounts receivable collected from the previous quarter:
For the 1st quarter, this is 80 percent of the beginning A/R balance. For the remaining quarters, the
company will collect (53/90) percent of the previous quarter sales since this is the balance remaining
at the end of the quarter.
Accounts receivable from current quarter sales:
The company will collect [(90 – 53)/90] percent of the current quarter sales.
Purchases last quarter paid this quarter:
The company purchases one-half of next quarter sales in the current quarter and takes 42 days to pay
the accounts payable. So, the accounts payable balance at the beginning of each quarter will be:
Payments for purchases from last quarter = (42/90)(Current quarter sales)(.50)
Purchases for next quarter paid this quarter:
Using the same payables period, the company will pay part of the current quarter orders. The current
quarter orders are based on next quarter’s sales, so:
Purchases paid for next quarter = [(90 – 42)/90](Current quarter sales)(.50)
Expenses are 30 percent of gross sales, while interest is constant. The cash flows for each quarter
will be:
CHAPTER 18 C-2
Net Cash Inflow
Q1 Q2 Q3 Q4
A/R at beginning of Q collected $516,000.00 $771,444.44 $818,555.56 $848,000.00
Sales collection in current Q 538,555.56 571,444.44 592,000.00 629,000.00
Purchases last Q paid this Q –305,666.67 –324,333.33 –336,000.00 –357,000.00
Purchase for next Q paid this Q –370,666.67 –384,000.00 –408,000.00 –374,666.67
Expenses –393,000.00 –417,000.00 –432,000.00 –459,000.00
Interest and dividends –135,000.00 –135,000.00 –135,000.00 –135,000.00
Outlay 0 0 0 –525,000.00
Net cash inflow –$149,777.78 $82,555.56 $99,555.56 –$373,666.67
So, the cash balance each quarter is:
Cash Balance
Q1 Q2 Q3 Q4
Beginning cash balance $305,000.00 $155,222.22 $237,777.78 $337,333.33
Net cash inflow –149,777.78 82,555.56 99,555.56 –373,666.67
Ending cash balance $155,222.22 $237,777.78 $337,333.33 –$36,333.33
Minimum cash balance 125,000.00 125,000.00 125,000.00 125,000.00
Cumulative surplus (deficit) $30,222.22 $112,777.78 $212,333.33 –$161,333.33
The short-term financial plan looks like this:
Short-Term Financial Plan
Target cash balance $125,000.00 $125,000.00 $125,000.00 $125,000.00
Net cash inflow –149,777.78 82,555.56 99,555.56 –373,666.67
New short-term investments 0 –82,875.78 –100,704.54 0
Income on short-term investments 1,800.00 320.22 1,148.98 2,156.03
Short-term investments sold 147,977.78 0 0 215,602.54
New short-term borrowing 0 0 0 155,908.11
Interest on short-term borrowing 0 0 0 0
Short-term borrowing repaid 0 0 0 0
Ending cash balance $125,000.00 $125,000.00 $125,000.00 $125,000.00
Minimum cash balance –125,000.00 –125,000.00 –125,000.00 –125,000.00
Cumulative surplus (deficit) $0 $0 $0 $0
Beginning short-term investments $180,000.00 $32,022.22 $114,898.00 $215,602.54
Ending short-term investments 32,022.22 114,898.00 215,602.54 0
Beginning short-term debt 0 0 0 0
Ending short-term debt $0 $0 $0 $155,908.11
CHAPTER 18 C-3
The interest calculations for each quarter and the net cash cost are:
Q1: Excess funds at start of quarter of $180,000.00 earns $1,800.00 in income.
Q2: Excess funds at start of quarter of $32,022.22 earns $320.22 in income.
Q3: Excess funds at start of quarter of $114,898.00 earns $1,148.98 in income.
Q4: Excess funds at start of quarter of $215,602.54 earns $2,156.03 in income.
Net cash cost
Q1 $1,800.00
Q2 320.22
Q3 1,148.98
Q4 2,156.03
Cash generated by short-term financing $5,425.23
2. If Piepkorn reduces its target cash balance to $100,000, 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 $305,000.00 $155,222.22 $237,777.78 $337,333.33
Net cash inflow –149,777.78 82,555.56 99,555.56 –373,666.67
Ending cash balance $155,222.22 $237,777.78 $337,333.33 –$36,333.33
Minimum cash balance 100,000.00 100,000.00 100,000.00 100,000.00
Cumulative surplus (deficit) $55,222.22 $137,777.78 $237,333.33 –$136,333.33
Short-Term Financial Plan
Target cash balance $100,000.00 $100,000.00 $100,000.00 $100,000.00
Net cash inflow –149,777.78 82,555.56 99,555.56 –373,666.67
New short-term investments 0 –83,128.28 –100,959.56 0
Income on short-term investments 2,050.00 572.72 1,404.01 2,413.60
Short-term investments sold 147,727.78 0 0 241,360.06
New short-term borrowing 0 0 0 129,893.01
Interest on short-term borrowing 0 0 0 0
Short-term borrowing repaid 0 0 0 0
Ending cash balance $100,000.00 $100,000.00 $100,000.00 $100,000.00
Minimum cash balance –100,000.00 –100,000.00 –100,000.00 –100,000.00
Cumulative surplus (deficit) $0 $0 $0 $0
Beginning short-term investments $205,000.00 $57,272.22 $140,400.50 $241,360.06
Ending short-term investments 57,272.22 140,400.50 241,360.06 0
Beginning short-term debt 0 0 0 0
Ending short-term debt $0 $0 $0 $129,893.01
CHAPTER 18 C-4
Q1: Excess funds at start of quarter of $205,000.00 earns $2,050.00 in income.
Q2: Excess funds at start of quarter of $57,272.22 earns $572.72 in income.
Q3: Excess funds at start of quarter of $140,400.50 earns $1,404.01 in income.
Q4: Excess funds at start of quarter of $241,360.06 earns $2,413.60 in income.
Net cash cost
Q1 $2,050.00
Q2 572.72
Q3 1,404.01
Q4 2,413.60
Cash generated by short-term financing $6,440.33
3. If Piepkorn offers the discounted terms, we must assume the sales will remain unchanged. However,
the effect of the discount will be to reduce the dollars received from the sales by the discount
percentage for the customers who take advantage of the discount. This will change the cash flows
Piepkorn receives. The net sales after the discount each quarter will be:
Q1 net sales = ($1,310,000)(.40)(1 – .01) + $1,310,000(.60)
Q1 net sales = $1,304,760
Q2 net sales = ($1,390,000)(.40)(1 – .01) + $1,390,000(.60)
Q2 net sales = $1,384,440
Q3 net sales = ($1,440,000)(.40)(1 – .01) + $1,440,000(.60)
Q3 net sales = $1,434,240
Q4 net sales = ($1,530,000)(.40)(1 – .01) + $1,530,000(.60)
Q4 net sales = $1,523,880
In addition to the reduction in sales, the collections period will decrease to 36 days. The collections
will be based off the lower sales figures, so the net cash inflows each quarter will be:
CHAPTER 18 C-5
Net Cash Inflow
Q1 Q2 Q3 Q4
A/R at beginning of Q collected $516,000.00 $521,904.00 $553,776.00 $573,696.00
Sales collection in current Q 782,856.00 830,664.00 860,544.00 914,328.00
Purchases last Q paid this Q –305,666.67 –324,333.33 –336,000.00 –357,000.00
Purchase for next Q paid this Q –370,666.67 –384,000.00 –408,000.00 –374,666.67
Expenses –393,000.00 –417,000.00 –432,000.00 –459,000.00
Interest and dividends –135,000.00 –135,000.00 –135,000.00 –135,000.00
Outlay –525,000.00
Net cash inflow $94,522.67 $92,234.67 $103,320.00 –$362,642.67
So, the cash balance each quarter will be:
Cash Balance
Q1 Q2 Q3 Q4
Beginning cash balance $305,000.00 $399,522.67 $491,757.33 $595,077.33
Net cash inflow 94,522.67 92,234.67 103,320.00 –362,642.67
Ending cash balance $399,522.67 $491,757.33 $595,077.33 $232,434.67
Minimum cash balance 100,000.00 100,000.00 100,000.00 100,000.00
Cumulative surplus (deficit) $299,522.67 $391,757.33 $495,077.33 $132,434.67
CHAPTER 18 C-6
The short-term financial plan under these assumptions will be:
Short-Term Financial Plan
Target cash balance $100,000.00 $100,000.00 $100,000.00 $100,000.00
Net cash inflow 94,522.67 92,234.67 103,320.00 –362,642.67
New short-term investments –96,572.67 –95,250.39 –107,288.23 0
Income on short-term investments 2,050.00 3,015.73 3,968.23 5,041.11
Short-term investments sold 0 0 0 357,601.55
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 $100,000.00 $100,000.00 $100,000.00 $100,000.00
Minimum cash balance –100,000.00 –100,000.00 –100,000.00 –100,000.00
Cumulative surplus (deficit) $0 $0 $0 $0
Beginning short-term investments $205,000.00 $301,572.67 $396,823.06 $504,111.29
Ending short-term investments 301,572.67 396,823.06 504,111.29 146,509.74
Beginning short-term debt 0 0 0 0
Ending short-term debt $0 $0 $0 $0
The interest earned each quarter is:
Q1: Excess funds at start of quarter of $205,000.00 earns $2,050.00 in income.
Q2: Excess funds at start of quarter of $301,572.67 earns $3,015.73 in income.
Q3: Excess funds at start of quarter of $396,823.06 earns $3,968.23 in income.
Q4: Excess funds at start of quarter of $504,111.29 earns $5,041.11 in income.
The net cash cost is:
Net cash cost
Q1 $2,050.00
Q2 3,015.73
Q3 3,968.23
Q4 5,041.11
Cash generated by short-term financing $14,075.07
The effective annual rate Piepkorn is offering to its customers is:
EAR = [1 + (.01/.99)]365/30 – 1
EAR = 13.01%
CHAPTER 18 C-7
4. In addition to the discount offered to customers, Piepkorn is now offered a discount from suppliers.
However, since the purchases from suppliers are a percentage of sales, we must assume these
purchases are for raw materials, which will not change except for the discount taken. Thus, we will
base the purchases off the gross sales figure. The net cash inflows each quarter will be:
Net Cash Inflow
Q1 Q2 Q3 Q4
A/R at beginning of Q collected $516,000.00 $521,904.00 $553,776.00 $573,696.00
Sales collection in current Q 782,856.00 830,664.00 860,544.00 914,328.00
Purchases last Q paid this Q –291,111.11 –304,255.56 –315,200.00 –334,900.00
Purchase for next Q paid this Q –380,319.44 –394,000.00 –418,625.00 –384,423.61
Expenses –393,000.00 –417,000.00 –432,000.00 –459,000.00
Interest and dividends –135,000.00 –135,000.00 –135,000.00 –135,000.00
Outlay –525,000.00
Net cash inflow $99,425.44 $102,312.44 $113,495.00 –$350,299.61
So, the cash balance each quarter will be:
Cash Balance
Q1 Q2 Q3 Q4
Beginning cash balance $305,000.00 $404,425.44 $506,737.89 $620,232.89
Net cash inflow 99,425.44 102,312.44 113,495.00 –350,299.61
Ending cash balance $404,425.44 $506,737.89 $620,232.89 $269,933.28
Minimum cash balance 100,000.00 100,000.00 100,000.00 100,000.00
Cumulative surplus (deficit) $304,425.44 $406,737.89 $520,232.89 $169,933.28
CHAPTER 18 C-8
The short-term financial plan will be:
Short-Term Financial Plan
Target cash balance $100,000.00 $100,000.00 $100,000.00 $100,000.00
Net cash inflow 99,425.44 102,312.44 113,495.00 –350,299.61
New short-term investments –101,475.44 –105,377.20 –117,613.53 0
Income on short-term investments 2,050.00 3,064.75 4,118.53 5,294.66
Short-term investments sold 0 0 0 345,004.95
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 $100,000.00 $100,000.00 $100,000.00 $100,000.00
Minimum cash balance –100,000.00 –100,000.00 –100,000.00 –100,000.00
Cumulative surplus (deficit) $0 $0 $0 $0
Beginning short-term investments $205,000.00 $306,475.44 $411,852.64 $529,466.17
Ending short-term investments 306,475.44 411,852.64 529,466.17 184,461.22
Beginning short-term debt 0 0 0 0
Ending short-term debt $0 $0 $0 $0
The interest earned each quarter will be:
Q1: Excess funds at start of quarter of $205,000.00 earns $2,050.00 in income.
Q2: Excess funds at start of quarter of $306,475.44 earns $3,064.75 in income.
Q3: Excess funds at start of quarter of $411,852.64 earns $4,118.53 in income.
Q4: Excess funds at start of quarter of $529,466.17 earns $5,294.66 in income.
And the net cash cost will be:
Net cash cost
Q1 $2,050.00
Q2 3,064.75
Q3 4,118.53
Q4 5,294.66
Cash generated by short-term financing $14,527.94
The effective annual rate the company’s suppliers are offering to Piepkorn is:
EAR = [1 + (.015/.985)]365/25 – 1
EAR = 24.69%