FINANCIAL PLANNING AND FORECASTING

Wildcat, Inc., has estimated sales (in millions) for the next four quarters as follows:
Q1 Q2 Q3 Q4
Sales $210 180 245 280

Sales for the first quarter of the year after this one are projected at $240 million. Accounts
Receivable at the beginning of the year was $ 68 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 36 days. Wages, taxes, and other expenses run
about 30 percent of sales. Interest and dividends is $12 million per quarter.
Wildcat plans a major capital outlay in the second quarter of $80 million. Finally, the company
started the year with a $64 million cash balance and wishes to maintain a $30 million balance.

1. Complete a cash budget for Wildcat.

Q1 Q2 Q3 Q4
Sales:
Beg. Receivables 68 105 90 122.5
Current Period Collections 105 90 122.5 140
TOTAL COLLECTIONS 173 195 212.5 262.5
Purchases:
Beg. Payables 37.8 32.4 44.1 50.4
Current Period Paid 48.6 66.15 75.6 64.8
Other Payments:
Wages, Taxes, and Other Expenses 63 54 73.5 84
Interest and Dividends 12 12 12 12
Capital Outlay 0 80 0 0
TOTAL DISBURESEMENTS (161.4) (244.55) (205.2) (211.2)
NET CASH INFLOW 11.6 (49.55) 7.3 51.3

WILDCAT, INC.
Cash Budget
(In millions)
Q1 Q2 Q3 Q4
Beginning cash balance $64.00 $75.60 $26.05 $33.35
Net cash inflow 11.6 (49.55) 7.3 51.3
Ending cash balance $75.60 $26.05 $33.35 $84.65
Minimum cash balance (30.00) (30.00) (30.00) (30.00)
Cumulative surplus (deficit) $45.60 ( $3.95) $ 3.35 $54.65

2. 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?
WILDCAT, INC.
Short-term Financial Plan
 (In millions)
Q1 Q2 Q3 Q4
Beginning cash balance $64.00 $30.00 $30.00 $30.00
Net cash inflow 11.60 (49.55) 7.30 51.30
New short-term investments (45.60) 0 (4.17) (51.38)
Income from short-term investments 0 .91 0 .08
Short-term investments sold 0 45.60 0 0
New short-term borrowing 0 3.04 0 0
Interest on short-term borrowing 0 0 (.09) 0
Short-term borrowing repaid 0 0 (3.04) 0
Ending cash balance $30.00 $30.00 $30.00 $30.00
Minimum cash balance (30.00) (30.00) (30.00) (30.00)
Cumulative surplus (deficit) 0 0 0 0
Beginning short-term investments 0 45.60 0 4.17
Ending short-term investments 45.60 0 4.17 55.55
Beginning short-term debt 0 0 3.04 0
Ending short-term debt 0 3.04 0 0

Net Cash Cost= $900,000

3. Rework the problem by assuming the following:

a. Wildcat maintains a minimum cash balance of $50 million.
WILDCAT, INC.
Short-term Financial Plan
(In millions)
Q1 Q2 Q3 Q4
Beginning cash balance $64.00 $50.00 $50.00 $50.00
Net cash inflow 11.60 (49.55) 7.30 51.30
New short-term investments (25.60) 0 0 (33.95)
Income from short-term investments 0 .51 0 0
Short-term investments sold 0 25.60 0 0
New short-term borrowing 0 23.44 0 0
Interest on short-term borrowing 0 0 (.7) (.51)
Short-term borrowing repaid 0 0 (6.6) (16.84)
Ending cash balance $50.00 $50.00 $50.00 $50.00
Minimum cash balance (50.00) (50.00) (50.00) (50.00)
Cumulative surplus (deficit) 0 0 0 0
Beginning short-term investments $0.00 $25.60 0 0
Ending short-term investments $25.60 0 0 33.95
Beginning short-term debt 0 0 23.44 16.84
Ending short-term debt 0 23.44 16.84 0

b. Wildcat maintains a minimum cash balance of $10 million.

WILDCAT, INC.
Short-term Financial Plan
 (In millions)
Q1 Q2 Q3 Q4
Beginning cash balance $64.00 $10.00 $10.00 $10.00
Net cash inflow 11.60 (49.55) 7.30 51.30
New short-term investments (65.60) 0 (7.65) (51.80)
Income from short-term investments 0 1.31 .35 .50
Short-term investments sold 0 48.24 0 0
New short-term borrowing 0 0 0 0
Interest on short-term borrowing 0 0 0 0
Short-term borrowing repaid 0 0 0 0
Ending cash balance $10.00 $10.00 $10.00 $10.00
Minimum cash balance (10.00) (10.00) (10.00) (10.00)
Cumulative surplus (deficit) 0 0 0 0
Beginning short-term investments 0 65.60 17.36 25.01
Ending short-term investments 65.60 17.36 25.01 76.81
Beginning short-term debt 0 0 0 0
Ending short-term debt 0 0 0 0

Based on your answers in (a) and (b), do you think the firm can boost its profit by changing its cash
management policy? Should other factors be considered as well? Explain.

 Yes. Based on the results, the firm can boost its profit if its minimum cash balance is
kept low and the cash surplus is invested. However, the firm should consider its short-
term obligations in deciding the minimum cash balance to be maintained so as not to
default on its payment.