CHAPTER 26
KEAFER 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 cash flows for each quarter will be:
Cash Flow
Q1
Q2
Q3
Q4
Collections from previous quarter
$607,500.00
$753,768.00
$780,444.00
$769,500.00
Cash Balance
Q1
Q2
Q3
Q4
Beginning cash balance
$210,000.00
$167,614.00
$267,560.00
$21,018.00
Net cash inflow
–42,386.00
99,946.00
–246,542.00
116,188.48
Ending cash balance
$167,614.00
$267,560.00
$21,018.00
$137,206.48
Minimum cash balance
135,000.00
135,000.00
135,000.00
135,000.00
Cumulative surplus –deficit
sales
previous quarter
quarter
Expenses
Dividends and interest
Outlay
Net cash flow
Interest on short-term borrowing
0
0
0
–844.13
Short-term borrowing repaid
0
0
0
–70,344.40
Ending cash balance
$135,000.00
$135,000.00
$135,000.00
$135,000.00
Minimum cash balance
–135,000.00
–135,000.00
–135,000.00
–135,000.00
Cumulative surplus –deficit
$0
$0
$0
$0
Beginning short-term investments
$75,000.00
$175,321.00
$0
Ending short-term investments
175,321.00
0
Beginning short-term debt
0
0
0
Ending short-term debt
$0
$0
$0
Q1:
Excess funds at start of quarter of
$375.00
Q2:
Excess funds at start of quarter of
$375.00
Q3:
Excess funds at start of quarter of
$876.61
Q4:
Shortage of funds at start of quarter of
$844.13
Q1
$375.00
Q2
375.00
Q3
876.61
Q4
Cash generated by short-term financing
Target cash balance
Net cash inflow
–246,542.00
New short-term investments
0
0
–44,999.95
Income on short-term investments
0
Short-term investments sold
0
0
New short-term borrowing
0
0
0
2. If Keafer reduces its target cash balance to $90,000, 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
$210,000.00
$167,614.00
$267,560.00
$21,018.00
New short-term borrowing
0
0
24,893.27
0
Interest on short-term borrowing
0
0
0
–298.72
Short-term borrowing repaid
0
0
0
–24,893.27
Ending cash balance
$90,000.00
$90,000.00
$90,000.00
$90,000.00
Minimum cash balance
–90,000.00
–90,000.00
–90,000.00
–90,000.00
Cumulative surplus –deficit
Beginning short-term investments
Ending short-term investments
120,000.00
220,546.00
0
90,996.49
Beginning short-term debt
0
0
0
24,893.27
Ending short-term debt
$24,893.27
Q1:
Excess funds at start of quarter of
in income.
Q2:
Excess funds at start of quarter of
in income.
Q3:
Excess funds at start of quarter of
in income.
Q4:
Shortage of funds at start of quarter of
in interest.
Q1
Q2
600.00
Q3
Q4
–298.72
Net cash inflow
116,188.48
Ending cash balance
$167,614.00
$267,560.00
$21,018.00
$137,206.48
Minimum cash balance
Cumulative surplus –deficit
$77,614.00
$47,206.48
Target cash balance
$90,000.00
$90,000.00
$90,000.00
$90,000.00
Net cash inflow
–42,386.00
99,946.00
116,188.48
New short-term investments
0
0
–90,996.49
Income on short-term investments
600.00
600.00
0
Short-term investments sold
41,786.00
0
220,546.00
0
3. If the sales growth rate is 11 percent, the cash flows for each quarter will be:
Cash Flow
Q1
Q2
Q3
Q4
Collections from previous quarter
$607,500.00
$774,706.00
$802,123.00
$790,875.00
Collections from current quarter
Q1
Q2
Q3
Q4
Beginning cash balance
$210,000.00
$154,700.50
$262,561.67
$25,143.50
Net cash inflow
–55,299.50
107,861.17
–237,418.17
117,011.64
Ending cash balance
$154,700.50
$262,561.67
$25,143.50
$142,155.14
Minimum cash balance
135,000.00
135,000.00
135,000.00
135,000.00
Cumulative surplus –deficit
$19,700.50
$127,561.67
$7,155.14
Target cash balance
$135,000.00
$135,000.00
$135,000.00
$135,000.00
Net cash inflow
107,861.17
117,011.64
New short-term investments
0
0
–63,106.63
Income on short-term investments
0
Short-term investments sold
0
183,236.17
0
New short-term borrowing
0
0
53,265.82
0
Interest on short-term borrowing
0
0
0
Short-term borrowing repaid
0
0
0
–53,265.82
Ending cash balance
$135,000.00
$135,000.00
$135,000.00
$135,000.00
Minimum cash balance
–135,000.00
–135,000.00
–135,000.00
–135,000.00
Cumulative surplus –deficit
$0
$0
$0
$0
Beginning short-term investments
$75,000.00
$75,000.00
$183,236.17
$0
Ending short-term investments
183,236.17
0
63,106.63
Beginning short-term debt
0
0
0
53,265.82
Ending short-term debt
$0
$0
$53,265.82
$0
sales
448,514.00
464,387.00
457,875.00
432,641.00
previous quarter
–360,170.33
Payments to suppliers for current
quarter
–260,338.17
Expenses
–305,805.00
Dividends and interest
–185,000.00
Outlay
Net cash flow
–$55,299.50
$107,861.17
$117,011.64
Q2
375.00
Q3
916.18
Q4
–639.19
Cash generated by short-term financing
$1,026.99
If the sales growth rate is 5 percent, the cash flows for each quarter will be:
Cash Flow
Q1
Q2
Q3
Q4
Collections from previous quarter
$607,500.00
$732,830.00
$758,765.00
$748,125.00
sales
439,285.00
433,125.00
409,255.00
previous quarter
quarter
–242,812.50
–229,430.83
–249,740.75
Expenses
–299,512.50
–295,312.50
–279,037.50
Dividends and interest
–185,000.00
–185,000.00
–185,000.00
Outlay
–390,000.00
Net cash flow
$92,030.83
$114,957.58
Cash Balance
Q1
Q2
Q3
Q4
Beginning cash balance
$210,000.00
$180,527.50
$272,558.33
$16,892.50
Net cash inflow
114,957.58
Ending cash balance
Cumulative surplus –deficit
Q1:
Excess funds at start of quarter of
Q2:
Excess funds at start of quarter of
Q3:
Excess funds at start of quarter of
Q4:
Shortage of funds at start of quarter of
Q1
$375.00
Short-term investments sold
29,097.50
0
167,405.83
0
New short-term borrowing
0
0
87,422.97
0
Interest on short-term borrowing
0
0
0
–1,049.08
Short-term borrowing repaid
0
0
0
–87,422.97
Ending cash balance
$135,000.00
$135,000.00
$135,000.00
$135,000.00
Minimum cash balance
Cumulative surplus –deficit
Beginning short-term investments
$75,000.00
$167,405.83
Ending short-term investments
167,405.83
Beginning short-term debt
Ending short-term debt
Q1:
Excess funds at start of quarter of
$375.00
Q2:
Excess funds at start of quarter of
$375.00
Q3:
Excess funds at start of quarter of
$837.03
Q4:
Shortage of funds at start of quarter of
Q1
$375.00
Q2
375.00
Q3
837.03
Q4
Cash generated by short-term financing
Target cash balance
Net cash inflow
–29,472.50
92,030.83
–255,665.83
New short-term investments
0
–92,405.83
0
–26,485.54
Income on short-term investments
0
4. Since the only period in which there is borrowing is the third period, we can set the ending short-term
debt in Quarter 3 equal to zero and use Solver. Doing so, we find the necessary sales growth rate is 21
percent. The short-term financial plan would be:
Cash Flow
Q1
Q2
Q3
Q4
Net cash flow
–$98,344.50
$134,245.06
–$207,005.39
$116,810.70
Cash Balance
Q1
Q2
Q3
Q4
Beginning cash balance
$210,000.00
$111,655.50
$245,900.56
$38,895.17
Net cash inflow
–98,344.50
134,245.06
–207,005.39
116,810.70
Ending cash balance
$111,655.50
$245,900.56
$38,895.17
$155,705.87
Minimum cash balance
135,000.00
135,000.00
135,000.00
Cumulative surplus –deficit
–$23,344.50
$110,900.56
Collections from previous quarter
$607,500.00
$844,499.33
$874,386.33
$862,125.00
sales
previous quarter
–392,618.11
quarter
–283,792.06
Expenses
–333,355.00
Dividends and interest
–185,000.00
Outlay
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
$135,000.00
$135,000.00
$135,000.00
$135,000.00
Minimum cash balance
–135,000.00
–135,000.00
–135,000.00
–135,000.00
Cumulative surplus –deficit
Beginning short-term investments
$75,000.00
$209,620.06
Ending short-term investments
209,620.06
120,491.78
Beginning short-term debt
Ending short-term debt
Q1:
Excess funds at start of quarter of
$375.00
in income.
Q2:
Excess funds at start of quarter of
$375.00
in income.
Q3:
Excess funds at start of quarter of
in income.
Q4:
Excess funds at start of quarter of
in income.
Q1
$375.00
Q2
375.00
Q3
1,048.10
Q4
Cash generated by short-term financing
Target cash balance
Net cash inflow
New short-term investments
0
0
Income on short-term investments
Short-term investments sold
0
0