Loblaw Manufacturing has asked you to create a cash budget in order to determine its borrowing needs over August to December period. You have gathered the following information.
Month Sales Other Payments
August 160,000 80,000
September 110,000 65,000
October 95,000 60,000
November 84,000 45,000
December 76,000 48,000
January 2009 90,000
June and July sales were $125,000 and $140,000, respectively. The firm collects 30% of its sales during the month, 60% the following month, and 10% two months after the sale. Each month it purchases inventory equal to 65% of the next month's expected sales. The company oats for 40% of its inventory purchases in the same month, and 60% in the following month. However, the firm's suppliers give it a 2% discount if it pays during the same month as the purchase. A minimum cash balance of $30,000 must be maintained each month, and the firm pays 9% annually for short-term borrowing from its bank.
a) Create a cash budget for August to December 2008. The cash budget should account for short-term borrowing and payback of outstanding loans.
b) Bob Loblaw, the president, is considering stretching out the firm's inventory payments. He believes that it may be less expensive to borrow from suppliers than from the bank. He has asked you to use the Scenario Manager to see what the total interest cost for this time period would be if the company paid for 0%, 10%, 30%, or 40% of its inventory purchases in the same month. The balance would be paid in the following month. Create a scenario summary and describe whether or not the results support Bob's beliefs.
A cash budget with financial analysis is created for Loblaw Manufacturing.