Case Study 8

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Case Study 8 Based on the January through June 2010 cash budget, what is the maximum monthly loss during the six-month planning period? What is the maximum cumulative borrowing balance? (For purposes of this question, disregard any interest payments on short-term bank loans or interest received from investing surplus funds.) Maximum monthly loss is in June: -$60,750. The maximum cumulative borrowing balance is $99,000 in February. What does the monthly cash budget reveal that indicates it should probably be extended beyond the original six months’ horizon? The major cash shortfall in June and the seasonality inherent in the firm’s business indicate that a full year’s cash budget should be developed. The monthly cash…show more content…
In both cases, the need for borrowing grows rather dramatically. While the base case cumulative maximum is $99,000 in February, the 20% case is $214,752 and the 50% case is a whopping $699,252. In these latter two cases, the cumulative maximums occur in June, but the negative balances are building month by month. Not one month in the 20% and 50% scenarios has a cumulative cash surplus, although the 20% case shows a couple of months with positive cash flows. Addressing the worksheet that reflects the change in the collection pattern, how does this affect the need for short term financing? How large a credit line would the clinic require as compared with the base case? Since outflows are occurring at the same rate, but inflows are slower, one would expect the need for short term financing to rise in the early months. In fact, this occurs: there is a $139,000 max in February vs. the base case’s $99,000 max in February. Note, however, that cumulative cash surpluses in the slower collection scenario outpace the base case surpluses in May and June. Finally, based on the entire scenario analysis, and what you know about the need for some surplus cash reserves, what would you recommend as the ‘ideal’ line of credit to pursue from First Bank? I would recommend a credit line of about $200,000, since this would easily cover the base case maximum cumulative cash shortfall of $99,000, and

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