14. Calculating the Cash Budget Wildcat, Inc.

, has estimated sales (in millions) for the next four

quarters as follows:
Q1 Q2 Q3 Q4
Sales $250 $200 $270 $300

Sales for the first quarter of the year after this one are projected at $250 million. Accounts
Receivable at the beginning of the year were $80 million. Wildcat has a 45 day collection period.
Wildcat’s purchases from suppliers in a quarter are equal to 45 percent of the next quarter’s
forecast sales, and suppliers are normally paid in 30 days. Wages, taxes, and other expenses run
about 30 percent of sales. Interest and dividends are $15 million per quarter.
Wildcat plans a major capital outlay in the second quarter of $100 million. Finally, the company
started the year with a $45 million cash balance and wishes to maintain a $45 million balance.

14. a. A 45-day collection period means sales collections each quarter are:

Collections = 1/2 current sales + 1/2 old sales

A 36-day payables period means payables each quarter are:

Payables = 2/3 current orders + 1/3 old orders; i.e., payables = 2/3 of current purchases +
1/3 of previous quarter purchases = [2/3 x .45 (next period sales)] + [1/3 x .45 (this
period sales)]

So, the cash inflows each quarter are:

Q1 = $80 + 1/2($250) – 2/3(.45)($200) – 1/3(.45)($250) – .30($250) – $15 =

$80 + 125 – 60 - 37.5 – 75 – 15 = 17.5
Q1 = $17.50

Q2 = 1/2($250) + 1/2($200) – 2/3(.45)($270) – 1/3(.45)($200) – .30($200) – $15 – 100 =

$125 + 100 – 81 – 30 – 60 – 15 – 100 = 225 – 286 = -61
Q2 = –$61.00

Q3 = 1/2($200) + 1/2($270) – 2/3(.45)($300) – 1/3(.45)($270) – .30($270) – $15 =

100 + 135 -90 – 40.5 – 81 – 15 = 235 – 226.5 = 8.5
Q3 = $8.50

Q4 = 1/2($270) + 1/2($300) – 2/3(.45)($250) – 1/3(.45)($300) – .30($300) – $15 =

$135 + 150 – 75 – 45 – 90 – 15 = 285 – 225 = 60
Q4 = $60.00

The company’s cash budget will be:

Wildcat Co.
Cash Budget
(in millions)
Q1 Q2 Q3 Q4
Beginning cash balance $45.00 $62.50 $1.50 $10.0
Net cash inflow 17.50 (61.00) 8.50 60.00
 Ending cash balance $62.50 $1.50 $10.00 $70.00
Minimum cash balance (45.00) (45.00) (45.00) (45.00)
Cumulative surplus (deficit) $17.50 ($43.50) ($ 35.00) $25.00

Work this problem by assuming

B. Wildcat maintains a minimum cash balance of $45 million.
Do you think the firm can boost its profit by changing its cash management policy? Should other
factors be considered as well? Explain.

B. Assume that Wildcat can borrow any needed funds on a short-term basis at a rate of 3
percent per quarter, and can invest any excess funds in short-term marketable securities at a rate of
2 percent per quarter. Prepare a short-term financial plan by filling in the following schedule. What
is the net cash cost (total interest paid minus total investment income earned) for the year?

14. A. With a minimum cash balance of $45M, the short-term financial plan will be:
Wildcat Inc.
Short-Term Financial Plan
(in millions)
Q1 Q2 Q3 Q4
Beginning cash balance $45.00 $45.00 $45.00 $45.00
Net cash inflow 17.50 (61.00) 8.50 52.50
New short-term investments (17.50) 0 0 (15.48)
Income on short-term investments .00 .35 0 0
Short-term investments sold 0 17.85 0 0
New short-term borrowing 0 43.15 0 0
Interest on short-term borrowing 0 0 (1.29) (1.08)
Short-term borrowing repaid 0 0 (7.21) (35.94)
Ending cash balance $45.00 $45.00 $45.00 $45.00
Minimum cash balance (45.00) (45.00) (45.00) (45.00)
Cumulative surplus (deficit) 0 0 0 0

Beginning short-term investments $0.00 $17.50 0 0

Ending short-term investments $17.50 0 0 $15.48
Beginning short-term debt 0 0 $43.15 $35.94
Ending short-term debt 0 $43.15 $35.94 0
No interest earned on $0 for qtr 1 because assumed began at $45. Interest earned on $17.50 at 2%
for qtr. 2 = $.35; interest paid on $43.15 at 3% for qtr. 3 = $1.29; interest paid on $35.94 at 3% for
qtr. 4 = $1.08
See the accompanying excel file to see how I did the calculations.

Since cash has an opportunity cost, the firm can boost its profit if it keeps its minimum cash balance
low and invests the cash instead. However, the tradeoff is that in the event of unforeseen
circumstances, the firm may not be able to meet its short-run obligations if enough cash is not
available.