¶ … Topeka Case Study
While it may be true that the retained earnings of the company provide a large amount of cash for future endeavors, there are several issues with using this cash to fund the necessary expansion efforts. First, this cash might simply be inadequate when it comes to funding the entire expansion, second, such a use would significantly impair the company's ability to operate if a supplier disruption or major payment issue arose, and third, this cash represents the only return on investment for the company's owners and stakeholders. All of these reasons make the securing of at least some external funding preferable.
1996 Pro-Form Income Statement
Revenue
Sales
$1,933,100.00
Expenses
Cost of sales (assumes 31% gross margin)
($1,333,839.00)
Debt payment
($20,000.00)
Facilities
($175,000.00)
income Before Taxes
$404,261.00
Tax Liability
Tax rate=40%
($161,704.40)
Income from Operations
$242,556.60
3)a.
It is assumed 40% of sales will be collected on a net 30 basis, with 80% on-time payment, and that 60% of sales will be made on a net 45 basis with 90% on-time payment. The average collection period for on time payments can thus be calculated as (.4x.8x30)+ (.6x.9x45)=33.9. Assuming that late payments are made within thirty days of the payment due date, late payment schedules can be calculated as (.4x.2x60)+(.6x.1x75)=9.3, bring the total average expected accounts receivable period to 43.2.
b.
With an expected average receivables period of 43.2 days on $1,933,100 receivables at the end of a 360-day year, total receivables at the end of the year could be estimated as $214,789.
4)
The purchase estimate for 1996 is based on the cost of goods ($1,333,839) plus beginning inventory ($149,500) less ending inventory (which has been a fairly consistent 13.9% of cost of goods, and can be estimated at $185,404), for a total of $1,297,935.
5)a.
Assuming 1/3 of all payments are made on a 2/10 net 30 basis and the remaining 2/3 will be made on a net 30 basis, the average payment period will be (.33x10)+(.66x30)=23.1.
b.
In a 360-day year with $1,333,839 in purchases and an average payment period of 23.1 days, the average level of payables would be $57,742.
6)
1996 Pro Forma Balance Sheet
Assets
Current Assets
Cash
$510,000.00
Receivables
$214,789.00
Inventory
$185,404.00
Total Current Assets
$910,193.00
Gross fixed assets
$2,836,000.00
Depreciation
($1,588,160.00)
Total Assets
$2,158,033.00
Liabilities and equity
Accounts Payable
$57,742.00
Debt due
$20,000.00
Curent liabilities
$1,073,000.00
Long-term debt
$60,000.00
Common stock
$110,000.00
Retained earnings
$837,291.00
Total Liability & Equity
$2,158,033.00
b.
It is possible that no additional funds (form external sources) will be necessary in 1996, as projected sales are not hugely different from 1995's actual sales. It is in 1997 and 1998 that funds will be required to expand operations. Funding that equals the cost of goods sold, other operational costs, and debt payments (in the neighborhood of $1,600,000) should be sufficient
c.
While reducing the cost of goods sold/inventory ratio would provide for a freer cash flow and thus ease concerns regarding operating capital, it would not present a significant cost savings and is thus not a point of essential consideration in the projection of these pro forma documents.
7.
In 1995, approximately 95% of sales revenue was needed to cover all operating expenses and debt payments. 95% of 1996's expected sales revenue ($1,933,100) is $1,836,445.
8.
The answers in 6(b) and & ought to be (and are) fairly similar; some discrepancy exists as it was not possible to adequately project administrative costs with the information given, and this expense is thus left out of the pro forma cash flow statement for 1996.
9.
Saving money tends to make sound financial sense in the long run for any company, and as long as operational expenses can be met with early payments the discount received is certainly worthwhile. If the company has to borrow at a rate of higher than 2% on a regular basis in order to make payments within 10 days to its suppliers, however, then this does not make financial sense during the growth period. For 1996, continuing to make 10 day payments and receive the discount is definitely sensible.
10)
Extending 15 days of extra credit makes sense at the current time, though after expanding (when a sale of this size will make up a smaller percentage of total revenue), establishing a stricter...
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