managers into closer alignment? CASE 10.2 CASH BUDGETS AND TREND ANALYSIS. Blue Sky Spas is a medium-sized franchisor of luxury spa facilities. It offers the full range of spa treatments, nail specialists, fitness snecialists, 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, pro- vides 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 Blue Sky for both regular sales revenue and product purchases. Bruce Compton, founder of Blue Sky Spas, watches his cash flow carefully from year to year. The cash flow infor- mation 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. Blue Sky Spas Cash Receipts Summary April ay June March February January 2620 2680 2750 2570 2530 2500 Total Franchisees $1,750,000 $1,750,000 $1,500,000 $1,250,000 $1,000,000 $750,000 New franchisees $7,860,000 $7,710,000 $7,500,000 $7,590,000 $7,410,000 $7,290,000 Monthly sales revenue $6,550,000 $6,325,000 $6,425,000 $6,250,000 $6,175,000 Product sales revenue $6,075,000 $15,415,000 $15,885,000 $16,160,000 $15,000,000 $14,585,000 Total cash receipts $14,115,000 Blue Sky Spas Cash Dispursements Summary June ay Apri March February January $4,230,000 $4,125,000 $4,020,000 $3,930,000 $3,855,000 For product sales $3,795,000 Blue Sky Spas Cash Dispursements Summary June May April March February January $5,494,000 $5,637,500 $5,371,000 $5,268,500 $5,186,500 $5,125,000 Marketing $3,216,000 $3.300,000 $3,144,000 $3,084,000 $3,036,000 $3,000,000 Franchise support $1,072,000 $1,100,000 $1,048,000 $1,028,000 $1,012,000 $1,000,000 Customer service $1,250,000 $1,250,000 $1,250,000 $1,250,000 $1,250,000 $1,250,000 General overhead $15,157,000 $15,517,500 $14,833,000 $14,560,500 $14,339,500 $14,170,000 Blue Sky Spas Cash Summary May June April March January February $2,015,000 $1.287,000 $705,000 $265,500 $20,000 $75,000 Beginning balance $16,160,000 $15,885,000 $15,415,000 $15,000,000 $14,5B5,000 $14,115,000 Plus Receipts $18,175,000 $17,172,000 $16,120,000 $15,265,500 $14,605,000 $14,190,000 Cash available $15,517,500 $14,833,000 $15,157,000 $14,560,500 $14,339,500 $14,170,000 Less Cash disbursements $2,657,500 $2,015,000 $1,287,000 $705,000 $265,500 $20,000 Ending cash balance Blue Sky Spas Income Statement May June March April February January $6,700,000 $6,875,000 $6,550,000 $6,325,000 $6,425,000 Product Sales $6,250,000 $(3,855,000) $(3,930,000) $C4,020,000) $(4,125,000) $C3,750,000) $(3,795,000) Less: Cost of Sales $2,530,000 $2,570,000 $2,620,000 $2,680,000 $2,750,000 $2,500,000 Gross Margin from product $750,000 $1,000,000 $1,250,000 $1,500,000 $1,750,000 $750,000 Franchise revenue $7,710,000 $8,250,000 $7,590,000 $7,860,000 $8,040,000 Service lees revenue $7,500,000 Total Gross Margin $10,870,000 $11,280,000 $11,730,000 $12,750,000 $10,750,000 $12,220,000 Less Marketing $5,186,500 $5,268,500 $5,637,500 $5,125,000 $5,371,000 $5,494,000 Franchise support $3,000,000 $3,036,000 $3,084,000 $3,300,000 $3,144,000 $3,216,000 Customer service $1,012,000 $1,100,000 $1,000,000 $1,028,000 $1,048,000 $1,072,000 General overhead $1,250,000 $1,250,000 $1,250,000 $1,250,000 $1,250,000 $1,250,000 Total S6&A $10,484,500 $10,375,000 $11,287,500 $10,630,500 $11,032,000 $10,813,000 Income before tax $375,000 $385,500 $649,500 $917,000 $1,188,000 $1,462,500 Taxes (30 %) $(112,500) $(115,650) $(194,850) $(275,100) $(438,750) $(356,400) Net income $262,500 $269,850 $454,650 $641,900 $1,023,750 $831,600 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 market- ing 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? managers into closer alignment? CASE 10.2 CASH BUDGETS AND TREND ANALYSIS. Blue Sky Spas is a medium-sized franchisor of luxury spa facilities. It offers the full range of spa treatments, nail specialists, fitness snecialists, 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, pro- vides 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 Blue Sky for both regular sales revenue and product purchases. Bruce Compton, founder of Blue Sky Spas, watches his cash flow carefully from year to year. The cash flow infor- mation 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. Blue Sky Spas Cash Receipts Summary April ay June March February January 2620 2680 2750 2570 2530 2500 Total Franchisees $1,750,000 $1,750,000 $1,500,000 $1,250,000 $1,000,000 $750,000 New franchisees $7,860,000 $7,710,000 $7,500,000 $7,590,000 $7,410,000 $7,290,000 Monthly sales revenue $6,550,000 $6,325,000 $6,425,000 $6,250,000 $6,175,000 Product sales revenue $6,075,000 $15,415,000 $15,885,000 $16,160,000 $15,000,000 $14,585,000 Total cash receipts $14,115,000 Blue Sky Spas Cash Dispursements Summary June ay Apri March February January $4,230,000 $4,125,000 $4,020,000 $3,930,000 $3,855,000 For product sales $3,795,000 Blue Sky Spas Cash Dispursements Summary June May April March February January $5,494,000 $5,637,500 $5,371,000 $5,268,500 $5,186,500 $5,125,000 Marketing $3,216,000 $3.300,000 $3,144,000 $3,084,000 $3,036,000 $3,000,000 Franchise support $1,072,000 $1,100,000 $1,048,000 $1,028,000 $1,012,000 $1,000,000 Customer service $1,250,000 $1,250,000 $1,250,000 $1,250,000 $1,250,000 $1,250,000 General overhead $15,157,000 $15,517,500 $14,833,000 $14,560,500 $14,339,500 $14,170,000 Blue Sky Spas Cash Summary May June April March January February $2,015,000 $1.287,000 $705,000 $265,500 $20,000 $75,000 Beginning balance $16,160,000 $15,885,000 $15,415,000 $15,000,000 $14,5B5,000 $14,115,000 Plus Receipts $18,175,000 $17,172,000 $16,120,000 $15,265,500 $14,605,000 $14,190,000 Cash available $15,517,500 $14,833,000 $15,157,000 $14,560,500 $14,339,500 $14,170,000 Less Cash disbursements $2,657,500 $2,015,000 $1,287,000 $705,000 $265,500 $20,000 Ending cash balance Blue Sky Spas Income Statement May June March April February January $6,700,000 $6,875,000 $6,550,000 $6,325,000 $6,425,000 Product Sales $6,250,000 $(3,855,000) $(3,930,000) $C4,020,000) $(4,125,000) $C3,750,000) $(3,795,000) Less: Cost of Sales $2,530,000 $2,570,000 $2,620,000 $2,680,000 $2,750,000 $2,500,000 Gross Margin from product $750,000 $1,000,000 $1,250,000 $1,500,000 $1,750,000 $750,000 Franchise revenue $7,710,000 $8,250,000 $7,590,000 $7,860,000 $8,040,000 Service lees revenue $7,500,000 Total Gross Margin $10,870,000 $11,280,000 $11,730,000 $12,750,000 $10,750,000 $12,220,000 Less Marketing $5,186,500 $5,268,500 $5,637,500 $5,125,000 $5,371,000 $5,494,000 Franchise support $3,000,000 $3,036,000 $3,084,000 $3,300,000 $3,144,000 $3,216,000 Customer service $1,012,000 $1,100,000 $1,000,000 $1,028,000 $1,048,000 $1,072,000 General overhead $1,250,000 $1,250,000 $1,250,000 $1,250,000 $1,250,000 $1,250,000 Total S6&A $10,484,500 $10,375,000 $11,287,500 $10,630,500 $11,032,000 $10,813,000 Income before tax $375,000 $385,500 $649,500 $917,000 $1,188,000 $1,462,500 Taxes (30 %) $(112,500) $(115,650) $(194,850) $(275,100) $(438,750) $(356,400) Net income $262,500 $269,850 $454,650 $641,900 $1,023,750 $831,600 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 market- ing 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