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Piepkorn Manufacturing Working Capital Management, Part 1
You have recently been hired by Piepkorn Manufacturing to work in its newly established treasury department. Piepkorn Manufacturing is a small company that produces cardboard boxes in a variety of sizes. Gary Piepkorn, the owner of the company, works primarily in the sales and production areas. 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 $154,000 and plans to purchase new box folding machinery in the fourth quarter at a cost of $325,000. The purchase of the machinery will be made with cash because of the discount offered. The company’s policy is to maintain a target cash balance of $100,000. All sales are in cash and all purchases are made on credit.
Gary Piepkorn has projected the following gross sales for each of the next four quarters:
Q1 Q2 Q3 Q4
Gross Sales 863,500 918,500 996,000 924,000
Gross sales for the first quarter of next year are projected at $908,000.
Piepkorn 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 30 percent of gross sales. The company has a quarterly interest payment of $115,000 on its long-term debt.
The company uses a local bank for its short-term financial needs. It pays 1.5 percent per quarter on all short-term borrowing and maintains a money market account that pays 1 percent per quarter on all short-term debt.
Gary 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.

Questions
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 Piepkorn changes to a target balance of $80,000
Piepkorn Manufacturing
Cash Budget
Q1 Q2 Q3 Q4
Beginning Cash Balance
Net Cash Inflow
Ending Cash Balance
Minimum Cash Balance
Cumulative Surplus (Deficit)
Piepkorn Manufacturing
Short-Term Financial Plan
Q1 Q2 Q3 Q4
Targeted Cash Balance
Net Cash Inflow
New Short-Term Investments
Income from Short-Term Investments
Short-Term Investments Sold
New Short-Term Borrowing
Interest on Short-Term Borrowing
Short-Term Borrowing Repaid
Ending Cash Balance
Minimum Cash Balance
Cumulative Surplus (Deficit)
Beginning Short-Term Investments
Ending Short-Term Investments
Beginning Short-Term Debt
Ending Short-Term Debt
After completing the short-term financial plan for next year (at the end of Chapter 16), Gary Piepkorn approaches you and asks about the company’s credit policy, In looking at the competition, most companies in the industry offer credit to customers, so Piepkorn Manufacturing appears to be one of the few companies that does not. Several customers have expressed the possibility of changing to a different supplier because of the lack of credit. Gary is interested in knowing how implementing a credit policy will affect the short-term financial plan for next year. Additionally, he would like you to inquire as to the possibility of getting improved credit terms for the company’s purchases.
To analyze the possible switch to the new credit terms, Gary has asked you to investigate industry standard credit terms and rework the short-term financial plan assuming Piepkorn Manufacturing offers credit to its customers. He would also like to investigate how better credit terms from the company’s suppliers would affect the short-term financial plan.
Questions
1. You have looked at the credit policy offered by your competitors and have determined that the industry standard credit policy is 1/10, net 45. The discount will begin to be offered on the first day of the year. You want to examine how this credit policy would affect the cash budget and short-term financial plan. If this credit policy is implemented, you believe that 60 percent of customers will take advantage of the credit offer and the accounts receivable period will be 24 days. Rework the cash budget and short-term financial plan under the new credit policy and a target cash balance of $80,000. What interest rate are you effectively offering customers?
2. You have talked to the company’s suppliers about the credit terms Piepkorn receives. Currently, the company receives terms of net 45. Your suppliers have stated that they would offer new credit terms of 2/25, net 40. The discount would begin to be offered on the first day of the year. What interest rate are the suppliers offering the company? Rework your cash budget and short-term financial plan from the previous question assuming you take advantage of the discount offered.