Blue Sky Spas is a medium- sized franchisor of luxury spa facilities. It offers the full range of spa treatments, nail specialists, fitness specialists, swimming, aquatic exercise programs, and yoga classes. Franchisees pay $25,000 for the right to use the name and receive support in setting up their spas. They, in turn, agree to buy 75% of their merchandise from the franchisor. In addition, the franchisee pays Blue Sky 10% of its total sales to help support marketing programs for the entire chain. Blue Sky, the franchisor, provides top-notch products to the spas, counseling and business analysis support, and marketing for the national chain. Of the products sold, the purchase cost is 60% of the dollar amount it charges the spas. Since Blue Sky buys in large quantities, it actually can sell the marked-up goods to the local spas for less than they could negotiate a similar product’s purchase on their own. Right now, Blue Sky has 2,500 franchisees that, on the average, buy $2,500 of product each month and book $30,000 in total revenues per month.

Blue Sky’s biggest challenge is keeping the chain growing and managing its cash flow (it has to pay for products and store them until the spas order them). The spas usually take 60 days to pay for both Blue Sky’s share of franchise regular sales revenue as well as product purchases. Bruce Compton, founder of Blue Sky Spas, watches his cash flow carefully from year to year.  The cash flow information for the last six months is laid out in the tables below. The monthly sales and product information is updated for the new number of franchisees each month, as you can see in the income statement.

Bruce is considering a new marketing blitz that would increase the number of new franchisees by 250 per month for the next three months, at which point it would drop back to the normal 60 new franchisees per month. Bruce would need to buy product to support each of these franchisees the month before they come online (just as he does now), which he would pay for in the month of purchase (that is, one month before he actually sells the goods to the franchisee). He would need to wait 60 days to receive payment for the goods and services the franchisee books. Bruce would provide services to the franchisees at the same level as he does now, which is $2,050 for marketing on average per franchisee, $1,200 per month per franchisee for franchise support, and $400
per month for customer service per franchisee. The new marketing blitz would add another $2.5 million to Blue Sky ’s July cash budget requirements. Fixed general overhead would increase to $1.5
million due to the increase in volume of franchisees. The question is: Can Bruce support this level of cash outlay to gain the new franchisees?

REQUIRED:

a. Extend the cash flow tables to cover July through December. Remember that the payments received are delayed by 60 days, so sales and product receipts made in June are not collected until August. Also remember that Bruce buys product one month in advance, so he buys and pays for goods for the next month’s level of franchisees.

b. Complete the income statement for the 12 months. Remember there is no lag here.

c. With your 12 months of cash data, do a trend analysis chart of cash receipts, cash disbursements, and ending cash balance on the same chart.

d. How do Blue Sky’s cash flow projections look given these projections?

e. Does the new marketing plan look like a good idea? Why or why not?

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Blue Sky Spas Cash Receipts Summary January February March April May June Total Franchisees 2500 2530 2570 2620 2680 750 New franchisees $750,000 $1,000,000 $1,250,000 $1,500,000 $1,750,000 $1,750,000 Monthly sales revenue $7,290,000 $7,410,000 $7,500,000 $7,590,000 $7,710,000 $7,860,000 Product sales revenue $6,075,000 $6,175,000 $6,250,000 $6,325,000 $6,425,000 $6,550,000 Total cash receipts $14,115,000 $14,585,000 $15,000,000 $15,415,000 $15,885,000 $16,160,000