Discussion 9


"Working Capital Management" Please respond to the following:

  • Examine the key reasons why a business may not want to hold too much or too little working capital. Provide two (2) examples that illustrate the consequences of either situation.
  • * From the scenario, analyze TFC’s cash budget to determine key methods in which the budget may be optimized (e.g., by renegotiating terms and conditions on some of its payables, etc.). If you believe that there is room for improvement, recommend key strategies for TFC to use in order to optimize its cash budget. If you do not believe that this is the case, provide a rationale for your response.


Slide #



Slide 1

Intro Scene


Slide 2

Scene 2

      Don in front of TFC with Linda

      End of scene


FIN534_9_2_Don-1:  Good day, Linda.  The Dividend policy review was fantastic.  Knowing where we stand as a company and how we can reward our shareholders is great management/investor relations.  As managers, we have certain commitments to TFC that include shareholder wealth, but also long term success of the company.  As investors, while long term success is good, they would like to see a return on their investment.  Being able to provide some type of return through dividends and accruing potential stock growth is a good business practice for us, especially if we have strong financials to back it up. 


As you know, we are a conservative company that may be going through a major expansion.  The board has not yet voted on the approval of the expansion project.  Two of the board members recommended that we look at our Cash Budget.


Since we are a conservative company we always want to make sure we are managing our cash effectively.  So I would like you to proceed with an analysis of the Cash Budget for the last half of the year to see where we stand. 


Good luck!  And if you don’t mind I would like to stick around and help out with this assignment.


FIN534_9_2_Linda-1:  Don, we are looking forward to it. This will allows us to get a better grasp on where the cash is and where it is going. I am supposed to meet the Intern in the conference room now.  Please come and join us, as another financial mind is always a financial plus. 



Slide 3

Scene 3

      Linda in the conference room

      Cash Budget on Screen

      Go to next slide

      (Is the Intern in the room?)


FIN534_9_3_Linda-1:  Cash budgets are important for businesses and personal use.  They can help you see where money is coming in and going out.  They can be for any length of time or over a time frame.  The more frequent the time frame the more you will see where money is going.  For example if you create a daily budget you can see where everything is going on a daily basis. But sometimes it is not necessary and monthly budgets will be better suited as payments that are made on a monthly basis.  But ultimately it is up to the company or individual as to what suits them best. 


FIN534_9_3_Linda-2: At TFC we never really analyzed our Cash Budget.  That might seem odd for a company our size, but we were always cash conscious so as long as we had sufficient cash we were fine with our cash account.  However, with a project of this magnitude analyzing the Cash Budget is important. 

Slide 4

Scene 4

·         Dollar Sign

·         Linda speaking

FIN534_9_4_Linda-1: Since we prepared our Cash Budget for this year, a lot has changed.  The expansion project has made us revisit our Cash Budget.  It is also a time for us to look at how we collect and pay out to see if change is needed.


We have decided to only look at the last six months of the year to see what our cash will look like on a monthly basis.  Typically our Cash Budget would be for twelve months, but this expansion project is an exception.


As you have noticed, when financial forms are created there is a chance that they will be revised.  A huge undertaking like this expansion has created a need to revisit it. 


There are many types of Cash Budgets and they are created to meet the needs of the business or individual.   There are a lot of projections that go into them so it is important that we have analyzed the projections before making a decision on what to use.

Slide 5

      Cash Budget

      Show Excel file

<click of file or have it open on the side>


FIN534_9_5_Linda-1:  Let’s take a deeper look into our Cash Budget for the next six months. 



At TFC we try to work with our “Body Builders”, by offering different payment plans.  We don’t offer a discount to our Body Builders as we believe our service and offerings are the difference with our competitors. But we do offer one month deferral at the same price.  You can call it a pay after the fact policy.


From past history and what the Accounting Department has supplied, fifty percent of our Body Builders pay in the current month while forty-five percent take advantage of the one month deferral option.  The remaining five percent pay in the second month.  Also, Accounting has told us that our delinquent rate for those “non-payers” is one percent.


FIN534_9_5_Don-1: Linda, I know we will revisit this later but one thing that I am concerned about is the forty-five percent one month deferral rate.  What would happen if out Body Builders decided not to pay?


FIN534_9_5_Linda-2: Don, excellent point and something we will look at with our analysis. From our Days Sales Outstanding ratio, we are well below the average, but this is worth some more analysis. Before doing so, let’s look at some other entries in the Cash Budget.

Slide 6

Scene 6

      Linda speaking – Cash Budget expenses

      Reinvestment of Dividends

      Stock Dividends


FIN534_9_6_Linda-1: On the payments side of our Cash Budget, our biggest cash outflow will be for operating expenses.  We also pay taxes on a quarterly basis which does cut into our cash account.  Also we are projecting partial payment for our expansion project in the last three months of the year.


We also projected the dividend payout at the end of the year.  We only used half of the total payout as our Cash Budget is only for the last six months of the year.


FIN534_9_6_Linda-2: Don, let us tap into your financial mind.  What can you tell us about the Cash Budget?

Slide 7

Scene 7

      Don speaking

      Analyzing the Cash Budget


FIN534_9_7_Don-1:  We would like to have a target ending cash amount of ten million dollars, but that is going to be tough to meet each month.  In doing so, we are projecting to have negative cash balances in two of the six months.  That is a concern. But the bigger concern is what I mentioned earlier.  Our payment plan is really beneficial to our Body Builders. 


With competition being at an all time high, we need to have creative payment plans but we also need to pay the bills!  With forty-five percent of our payments not being collected in the current month, we are really opening ourselves up.  However, we do have a really good collection rate of ninety-nine percent.  If we can sustain that, then the forty-five percent deferred payment to month one may not be that bad

Another area to look at is this expansion project.  If TFC is paying eight million each month, we are looking at some negative months amounts.  It also shows that our earlier month, before the expansion, is helping in the expansion months.  Also, the cash dividend payment will really drain our cash account.  


This, however, is expected from a cash perspective for a project of this magnitude.  But can anything be done? We are still in negotiations with the buyers of the facilities that are part of the expansion project.  Maybe we can review some situational analyses to see if we can strengthen our cash balance per month.

Slide 8

Scene 8 - CYU

      Don would like you to do some situational analysis to look at the Cash Budget further

      1) What happens if we change the $8,000 to $4,000 for the Payment for expansion project and loans line item?

A) Cash flow is in a better position (correct answer – Correct!  By freeing up payments, TFC will be in a better cash position)

B) Cash flow is in a worse position (Nice try, but the company was able to free up cash which will result in better cash flow in meeting its goals.)

c) Cash flow is in the same position (Nice try, but the company was able to free up cash which will result in better cash flow in meeting its goals.)



      2) - What happens to the overall cash at end of the year when you change bad debt to 3%?

      A) Cash flow increases by $6,400 (Nice try but since the bad debt expenses – not getting paid- went up, it will have a negative impact on cash flows

      B) Cash flow decreases by $6,400 (Excellent!  Increasing bad debt will negatively affect cash and decrease it.  Management needs to take this into consideration when setting goals.)

      3) What happens at end of year if we remove dividend payment?

A) Ending cash will be $25,000

C) Ending cash will be positive $16,250 (Correct – freeing up $25,000 will increase cash from a negative -$8,750.  But is this a choice that the company would want to make?)


      D) Ending cash will be negative $16,250 (Nice try but the company was able to free up cash which will result in better cash flow in meeting its goals)


      Next slide



Slide 9

Scene 9 –

·         Don in room

·         Disadvantages of repurchasing shares



FIN534_9_9_Don-1: Good analysis.  Cash is our building block and changes to our inflows and outflows can make a difference to the bottom line.  The last choice that was given involved eliminating the cash dividend.  While it would create a lot of extra cash for us, that choice may not be the best. 


Paying a dividend can help increase investor satisfaction and possibly reduce agency conflicts.  Maybe a better choice would be to look at other ways TFC can increase its cash position.  The change in the payment schedule helped free up cash while still being able to make a dividend payment.  This may be a better way to go if a suitable payment plan can be negotiated with creditors. 


As you were able to see, the Cash Budget is good for creating those “What if?” scenarios.


FIN534_9_9_Linda-1:  Don, I understand now.  I know we have always been concerned with cash but this brings it to another level. 


Now that we are on the Cash Budget.  It looks very similar to the income statement.  Can the Cash Budget replace the income statement?


FIN534_9_9_Don-2:  Linda, very good question.  The quick answer is they are very different although they appear to be similar.  Let’s look at some of the key reasons.

Slide 10

Scene 10

      Show difference between Cash Budget and income statement

      Next screen


FIN534_9_10_Don-1:  At first look you can see how the Cash Budget and income statement could be similar but here are some differences.


First, typically income statements are on an accrual basis, meaning the expense or revenue is recorded when incurred not when cash actually changes hands.


Second, Income Statements are more concerned with revenue and not collecting the revenue.  The Cash Budget focuses on the collections piece in the form of cash.


Third, depreciation of a fixed asset is shown on an income statement as an expense where the Cash Budget looks at the cash transaction of the asset.


So while, they appear to look the same, they are different.  They both are important in the financial analysis of TFC and are related in certain aspects, but there are also differences, as each one has a specific purpose.  The Income Statement looks at profit or loss over a specific period while the Cash Budget looks at TFC’s liquidity position in the future.

Slide 11

Scene 11


      Select all the reasons how Income statements differ from Cash Budgets



A) Cash Budgets are recorded on a cash basis while Income Statements record transactions on an accrual basis (Correct – cash budgets want to see how cash is changing while income statements are more focused on profits)


B) Depreciation Expense is recorded as an expense on Income Statements but not with Cash Budgets. (Correct – Depreciation is not recorded on Cash Budgets because cash is not changing hands)


C)  Dividend policy is determined but Cash Budget not Income Statement (Incorrect – while both the Cash Budget and Income Statement are considered when establishing the dividend policy the Board of Directors will approve the dividend payments


D) Income Statements are more about profitability while Cash Budgets are about liquidity (Correct – Cash budgets are concerned about cash inflows and outflows)

      Next Slide


Slide 12

Scene 12

      Don in conference room

      Linda in conference room


FIN534_9_12_Don-1: Excellent work.  Linda your Intern is incredible.


FIN534_9_12_Linda-1: I know Don.  Throughout this entire process the Intern has been doing great work.  You can tell that Strayer University is really preparing their students in making these difficult financial decisions.


FIN534_9_12_Don-2: I agree Linda.  Keep in mind that the Cash Budget that TFC prepared covers the areas of bringing in cash and spending it.  Detailed analysis is needed to help with decision making.  And our analysis has shown us that we need to look at our payment plans to our Body Builders as well as negotiating our capital expenditure for this expansion project. 


I will be meeting with Joe later to share the results with him


FIN534_9_12_Linda-2: And let’s not forget our Board members.  If it weren’t for them we would not have analyzed both the Dividend Policy and Cash Budget as we did.  It is nice to have an engaging Board of Directors who know what questions to ask.

Slide 13

Scene 13

      Linda Summary slide

  • Next Slide

FIN534_9_13_Linda-1:  The Cash Budget is a financial form that appears to be straightforward is more than that.  As we see, the Cash Budget is very important! It allows us to determine how much credit  can be extended before we have liquidity problems.


We started by looking at TFC’s remaining six month Cash Budget.  Typically Cash Budgets are on a year basis but since we want to work on the project now, we reviewed the last six months.  We learned that while the Cash Budget may look like the Income Statement, there are a lot of differences.  One of the primary differences is that the Income Statement is usually on an accrual basis while the Cash Budget is on a cash basis. 


We also learned that detailed projections are important as they are used to assess the overall expected cash position of TFC.  And any change in them can affect this expected cash position.


And let’s not forget that Income Statements are primarily focused on profitability while Cash Budgets are focused on liquidity.


So while TFC has many financial forms, each has a particular emphasis.  The Cash Budget focuses on the inflows and outflows of cash.  And we all know how important cash is to TFC.


All this talk about cash has made me ready for a workout. Let's go!

Slide 14

Scene 14

      Closing slide


Closing slide








TFC's Cash Budget, July - December, 2013 (Dollars in Thousands)   
Payment Terms For Body Builders: Current Terms      
Percentage of Body Builders who pay in 1st month  50%      
Percentage of  Body Builders who pay in 2nd month  45%      
Percentage of  Body Builders who don't pay in 1st or 2nd month.  5%      
Bad debt Percentage (not collected) - reduces 3rd month payments received1%      
TFC's Cash Budget, July - December, 2013 (Dollars in Thousands)           
Projected Cash Transactions:   MayJuneJulyAugustSeptOctNovDec
Sales Forecast:    $55,000$55,000$55,000$55,000$50,000$50,000$60,000$60,000
Cash Collections on sales:           
During Current month:0.5(Sales)    $27,500.0$27,500.0$25,000.0$25,000.0$30,000.0$30,000.0
During 2nd month: 0.45(prior month's sales)   $24,750.0$24,750.0$24,750.0$22,500.0$22,500.0$27,000.0
Due in 3rd month: 0.1(sales 2 months ago)   $2,750.0$2,750.0$2,750.0$2,750.0$2,500.0$2,500.0
   Less bad debts (BD% × Sales 2 months ago)    −$550.0−$550.0−$550.0−$550.0−$500.0−$500.0
Total Cash Collections:     $54,450.0$54,450.0$51,950.0$49,700.0$54,500.0$59,000.0
Cash Payments:            
Operating Expenses     $45,000.0$45,000.0$45,000.0$45,000.0$45,000.0$45,000.0
Other payments (interest on LT bonds, dividends, etc.)   $0.0$0.0$0.0$0.0$0.0$25,000.0
Taxes        $6,900.0  $6,900.0
Payment for expansion project and loans       $8,000.0$8,000.0$8,000.0
   Total Cash Payments:     $45,000.0$45,000.0$51,900.0$53,000.0$53,000.0$84,900.0
Net cash flows:            
Assuming zero cash to begin forecasted period   $0.0     
Net cash flow: Total Cash Collections – Total Cash Payments  $9,450.0$9,450.0$50.0−$3,300.0$1,500.0−$25,900.0
Cumulative Cash Balance     $9,450.0$18,900.0$18,950.0$15,650.0$17,150.0−$8,750.0
Cash surplus/shortage:           
Target cash balance per month    $10,000.0$10,000.0$10,000.0$10,000.0$10,000.0$10,000.0
Cash Surplus or Shortage per month:    −$550.0$8,900.0$8,950.0$5,650.0$7,150.0−$18,750.0


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