Net Working Capital Why is short-term financial planning crucial to a company?
Cash Review the different ways in which cash can increase or decrease in a firm. Use the accounting equation to support your answer.
The Operating Cycle and Cash Cycle What are some of the characteristics of a firm with a long operating cycle? Similarly, what are some of the characteristics of a firm with a long cash cycle?
Short-term Financial Policy Review the various financing policies to manage current assets.
Cash Budgeting Explain what is meant by cash budgeting.
The Short-term Financial Plan Review the various ways a firm can finance a short-term cash deficit.
Sources and Uses For the year just ended, you have gathered the following information about the Mia plc:
A £200 dividend was paid.
Trade payables increased by £500.
Fixed asset purchases were £900.
Inventories increased by £625.
Long-term debt decreased by £1,200.
Label each as a source or use of cash and describe its effect on the firms cash balance.
Cost of Current Assets Loftis Manufacturing NV has recently installed a just-in-time (JIT) inventory system. Describe the effect this is likely to have on the companys carrying costs, shortage costs, and operating cycle.
Operating and Cash Cycles Is it possible for a firms cash cycle to be longer than its operating cycle? Explain why or why not.
Shortage Costs What are the costs of shortages? Describe them.
Reasons for Net Working Capital In an ideal economy, net working capital is always zero. Why might net working capital be positive in a real economy?
Use the following information to answer Questions 12–16. Last month, BlueSky Airlines announced that it would stretch out its bill payments to 45 days from 30 days. The reason given was that the company wanted to ‘control costs and optimize cash flow’. The increased payable period will be in effect for all of the companys 4,000 suppliers.
Operating and Cash Cycles What impact did this change in payables policy have on BlueSkys operating cycle? Its cash cycle?
Operating and Cash Cycles What impact did the announcement have on BlueSkys suppliers?
Corporate Ethics Is it ethical for large firms to unilaterally lengthen their payable periods, particularly when dealing with smaller suppliers?
Payables Period Why dont all firms simply increase their payables periods to shorten their cash cycles?
Payables Period BlueSky lengthened its payables period to ‘control costs and optimize cash flow’. Exactly what is the cash benefit to BlueSky from this change?
Changes in the Cash Account Indicate the impact of the following corporate actions on cash, using the letter I for an increase, D for a decrease, or N when no change occurs.
A dividend is paid with funds received from a sale of debt.
Property is purchased and paid for with short-term debt.
Inventory is bought on credit.
A short-term bank loan is repaid.
Next years taxes are prepaid.
Preference shares are redeemed.
Sales are made on credit.
Interest on long-term debt is paid.
Payments for previous sales are collected.
The trade payables balance is reduced.
A dividend is paid.
Production supplies are purchased and paid with a short-term note.
Utility bills are paid.
Cash is paid for raw materials purchased for inventory.
Marketable securities are sold.
Cash Equation Eurasian Natural Resources plc, a Kazakhstani firm listed on the London Stock Exchange, has total non-current assets of $4,938 million. Non-current liabilities are $1,038 million. Current assets, other than cash, are $2,098 million. Current liabilities are $1,161 million. Total equity is worth $7,176 million. How much cash does the company have?
Changes in the Operating Cycle Indicate the effect that the following will have on the operating cycle. Use the letter I to indicate an increase, D for a decrease, and N for no change.
Receivables average goes up.
Credit repayment times for customers are increased.
Inventory turnover goes from 3 times to 6 times.
Payables turnover goes from 6 times to 11 times.
Receivables turnover goes from 7 times to 9 times.
Payments to suppliers are accelerated.
Changes in Cycles Indicate the impact of the following on the cash and operating cycles, respectively. Use the letter I to indicate an increase, D for a decrease, and N for no change.
The terms of cash discounts offered to customers are made less favourable.
The cash discounts offered by suppliers are increased: thus payments are made earlier.
An increased number of customers begin to pay in cash instead of with credit.
Fewer raw materials than usual are purchased.
A greater percentage of raw material purchases are paid for with credit.
More finished goods are produced for inventory instead of for order.
Calculating Cash Collections Pindado SA has projected the following quarterly sales amounts for the coming year:
Trade receivables at the beginning of the year are €300. Pindado has a 45-day collection period. Calculate cash collections in each of the four quarters by completing the following:
Rework (a) assuming a collection period of 60 days.
Rework (a) assuming a collection period of 30 days.
Calculating Cycles Consider the following financial statement information for Bulldog Ice plc: calculate the operating and cash cycles. How do you interpret your answer?
Calculating Payments Lewellen Products has projected the following sales for the coming year:
Sales in the year following this one are projected to be 15 per cent greater in each quarter.
Calculate payments to suppliers, assuming that Lewellen places orders during each quarter equal to 30 per cent of projected sales for the next quarter. Assume that the company pays immediately. What is the payables period in this case?
Rework (a) assuming a 90-day payables period.
Rework (a) assuming a 60-day payables period.
Calculating Payments Marshall plcs purchases from suppliers in a quarter are equal to 75 per cent of the next quarters forecast sales. The payables period is 60 days. Wages, taxes and other expenses are 20 per cent of sales, and interest and dividends are £60 per quarter. No capital expenditures are planned.
Here are the projected quarterly sales:
Sales for the first quarter of the following year are projected at £970. Calculate the companys cash outlays by completing the following:
Calculating Cash Collections The following is the sales budget for Freezing Snow plc for the first quarter of 2010:
Credit sales are collected as follows:
65 per cent in the month of the sale.
20 per cent in the month after the sale.
15 per cent in the second month after the sale.
The accounts receivable balance at the end of the previous quarter was £57,000 (£41,000 of which was uncollected December sales).
Compute the sales for November.
Compute the sales for December.
Compute the cash collections from sales for each month from January to March.
Calculating the Cash Budget Here are some important figures from the budget of Sagmo AB for the second quarter of 2010:
The company predicts that 5 per cent of its credit sales will never be collected, 35 per cent of its sales will be collected in the month of the sale, and the remaining 60 per cent will be collected in the following month. Credit purchases will be paid in the month following the purchase.
In March 2010 credit sales were NKr210,000, and credit purchases were NKr156,000. Using this information, complete the following cash budget:
Sources and Uses Here are the most recent balance sheets for the Danish Transport and Logistics firm DSV A/S. Excluding accumulated depreciation, determine whether each item is a source or a use of cash, and the amount:
Cash Budgeting The sales budget for your company in the coming year is based on a 20 per cent quarterly growth rate with the first-quarter sales projection at £100 million. In addition to this basic trend, the seasonal adjustments for the four quarters are 0, −£10, −£5 and £15 million, respectively. Generally, 50 per cent of the sales can be collected within the quarter and 45 per cent in the following quarter; the rest of sales are bad debt. The bad debts are written off in the second quarter after the sales are made. The beginning accounts payable balance is £81 million. Assuming all sales are on credit, compute the cash collections from sales for each quarter.
Calculating the Cash Budget Wildcat SA has estimated sales (in millions) for the next four quarters as follows:
Sales for the first quarter of the year after this one are projected at €250 million. Accounts receivable at the beginning of the year were €79 million. Wildcat has a 45-day collection period.
Wildcats purchases from suppliers in a quarter are equal to 45 per cent of the next quarters forecast sales, and suppliers are normally paid in 36 days. Wages, taxes and other expenses run at about 30 per cent of sales. Interest and dividends are €15 million per quarter.
Wildcat plans a major capital outlay in the second quarter of €90 million. Finally, the company started the year with a €73 million cash balance and wishes to maintain a €30 million minimum balance.
Complete a cash budget for Wildcat by filling in the following:
Assume that Wildcat can borrow any needed funds on a short-term basis at a rate of 3 per cent per quarter, and can invest any excess funds in short-term marketable securities at a rate of 2 per cent per quarter. Prepare a short-term financial plan by filling in the following schedule. What is the net cash cost (total interest paid minus total investment income earned) for the year?
Cash Management Policy Rework Problem 29 assuming the following:
Wildcat maintains a minimum cash balance of €45 million.
Wildcat maintains a minimum cash balance of €15 million.
Based on your answers in (a) and (b), do you think the firm can boost its profit by changing its cash management policy? Should other factors be considered as well? Explain.
Short-Term Finance Policy Renault SA and Peugeot SA are competing automobile manufacturing firms. Download their annual financial accounts for the most recent period from each companys website.
How are the current assets of each firm financed?
Which firm has the larger investment in current assets? Why?
Which firm is more likely to incur carrying costs, and which is more likely to incur shortage costs? Why?