You have recently been hired by ABC Manufacturing to work in the newly established treasury department. ABC Manufacturing is a small company that produces cardboard boxes in a variety of sizes for different purchasers. Ali, the owner of the company, works primarily in the sales and production areas of the company. Currently, the company puts all receivables in one shoe box and all payables in another. Because of the disorganized system, the finance area needs work, and that’s what you’ve been brought in to do.

The company currently has a cash balance of PKR180,000, and it plans to purchase new box folding machinery in the fourth quarter at a cost of PKR260,000. The machinery will be purchased with cash because of a discount offered. The company’s policy is to maintain a minimum cash balance of PKR100,000. All sales and purchases are made on credit.

Ali has projected the following gross sales for each of the next four quarters:

                                                      Q1                        Q2                        Q3                         Q4 

Group Sales (PKR ‘000)               800                       850                       860                       880

Also, gross sales for the first quarter of next year are projected at PKR890,000. Ali currently has an accounts receivable period of 58 days and an accounts receivable balance of PKR550,000. Ten percent of the accounts receivable balance is from a company that has just entered bankruptcy, and it is likely this portion of the accounts receivable will never be collected.

Ali typically orders 50 percent of next quarter’s projected gross sales in the current quarter, and suppliers are typically paid in 53 days. Wages, taxes, and other costs run about 25 percent of gross sales. The company has a quarterly interest payment of PKR85,000 on its long-term debt.

The company uses a local bank for its short-term financial needs. It pays 1.5 percent per quarter in all short-term borrowing and maintains a money market account that pays 1 percent per quarter on all short-term deposits.

Ali has asked you to prepare a cash budget and short- term financial plan for the company under the current policies. He has also asked you to prepare additional plans based on changes in several inputs.

1. Use the numbers given to complete the cash budget and short-term financial plan.
2. Rework the cash budget and short-term financial plan assuming ABC changes to a minimum balance of PKR125,000.