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Cash Flow Management Strategies

This document contains calculations and analyses related to reducing float time and bad debts for two companies. For the first company, implementing a lockbox system that reduces float from 8 to 5 days would decrease cash balances by 660,000, earning interest of 66,000 annually. The maximum monthly charge should be 5,500. For the second company, Goldston & Co, implementing a more restrictive credit policy that reduces sales by 8% but bad debts from 6% to 2.6% would increase annual operating income by over 1 million and should be adopted, but not if bad debts only fall to 4%.

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Bryent Gaw
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2K views2 pages

Cash Flow Management Strategies

This document contains calculations and analyses related to reducing float time and bad debts for two companies. For the first company, implementing a lockbox system that reduces float from 8 to 5 days would decrease cash balances by 660,000, earning interest of 66,000 annually. The maximum monthly charge should be 5,500. For the second company, Goldston & Co, implementing a more restrictive credit policy that reduces sales by 8% but bad debts from 6% to 2.6% would increase annual operating income by over 1 million and should be adopted, but not if bad debts only fall to 4%.

Uploaded by

Bryent Gaw
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
  • Problem Analysis and Solutions
  • Credit Policy Evaluation

I. A firm has daily cash receipts of P100,000 and collection time of 2 days.

A bank has offered to decrease the collection time on the


firm’s deposits by two days for a monthly fee of P500.

12. If money market rates are expected to average 6% during the year, the net annual benefit loss) from having this service is

100,000 × 2 days = 200,000

Benefit (loss) = Interest earned – Cost

= (200,000 × 6%) –(500 × 12 months)

= 12,000 –6,000

= P6,000

J. It typically takes Nexus Inc. 8 days to receive and deposit customer remissions. Nexus is considering a lockbox system and anticipates
that the system will reduce the float time to 5 days. Average daily cash receipts are P220,000. The rate of return is 10 percent.

13. What is the reduction in cash balances associated with implementing the system?

The reduction in outstanding cash balances arising from implementing the lockbox system is:

3 days x 220,000 = 660,000

14. What is the rate of return associated with the earlier receipt of the funds?

The return that could be earned on these funds is:

660,000 x 0.10 = 66,000

 
15. What should be the maximum monthly charge associated with the lockbox proposal?

The maximum monthly charge the company should pay for this lockbox arrangement is therefore:

66,000/12 = 5,500

K. Proxy Company turns out 200 flash drives a day at a cost of P300 per drive for materials and variable conversion cost. It takes the
firm 18 days to convert raw materials into flash drives. Proxie’s usual credit terms extended to its customers is 30 days, and the firm
generally pays its suppliers in 20 days.

16. If the foregoing cycles are constant, what amount of working capital must Proxy Company finance?

Working Capital = Cost of Goods Sold (Estimated) * (No. of Days of Operating Cycle / 365 Days) + Bank and Cash Balance.

200 x 300 = 60,000 x 365 = 21,900,000


18/365 = .049

21,900,000 x .049 = P1,080,000

V. Over the past few years, the marketing department at Goldston & Co has convinced the finance department to permit credit sales to
increasingly marginal customers. Revenue has risen as a result, but bad debts are now at 6% of sales. Finance has suggested that credit
policy be tightened to reduce bad debt losses. Their proposal calls for a more restrictive policy under which sales would fall by 8% but
bad debt losses would drop to 2.6% of revenue. Under the current policy Golston’s revenue forecast is $400 million with a contribution
margin of 38%. Implementing the new credit policy wouldn’t have an effect on contribution margin but would require an additional
$500,000 in annual fixed costs.
27.) Should Goldston implement finance’s new credit policy?

Current Policy New Policy

Cash from sales 400M x .94 = 376M Cash from sales 400M x .974 x .92 = 358,432,000
Corporate Expenses 400M x .62 = 248M Corporate Expense 400M x .62 x .92 = 228,160,000
Contribution Margin 128M Contribution Margin 130,272,000
Fixed Cost 0 Fixed Cost 500,000
Operating Income 128M Operating Income 129,772,000

With higher Operating Income, the new policy should be implemented.

28.) Should the new policy be implemented if bad debts only are only expected to drop to 4% of revenues?

Cash from sales 400M x .96 x .92 = 353,280,000


Corporate Expense 400M x .62 x .92 = 228,160,000
Contribution Margin 125,120,000
Fixed Cost 500,000
Operating Income 124,620,000

With a lower Operating Income, the new policy shouldn’t be implemented

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