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    Cash Budgeting for a National Charity

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    Part 1: Managers have to plan for the future. Assume your firm is a small to midsize not-for-profit organization and that you rely on the percent of sales method of forecasting. What if any are the short comings of this forecasting technique?
    Why would a cash budget be of particular importance to a firm that experiences seasonal fluctuations in sale?

    Part 2: Greg Dye Inc. is a successful wholesaler of Speedo bathing suits. He has seasonal needs for working capital. He is planning his firm's short-term financing strategy for the next six months. He anticipates either one of two situations arising:
    1. The firm will need $40,000,000 for six months
    2. The firm will need $40,000,000 for only three months.
    Greg, however, must plan for either situation since there is an equal likelihood that either event will occur.
    One possible source of funds is commercial paper. He has been informed that his firm may issue $42,190,000 worth of commercial pper and receive $40,000,000. The paper will be due at the end of six months. A second possibility is to borrow from the First Bank of Edison, which offers a line of credit with an annual interest rate of 9.5% and an origination fee of 2%. A competing bank, Taitsman Trust Company, offers revolving credit of $50,000,000 at 9% but with a fee on the unused balance of 0.5% paid at the end of 6 months.
    Which alternative should Greg Dye Inc take? Defend your answer.

    Part 3: Your unit was just assigned a new college grad to determine the optimal order quantity for your organization. She simply plugged some numbers into the EOQ method described in the text and said that your outfit should order 10,000 rounds of ammunition at a time. What assumptions did this person make that might not be applicable to your unit?

    Part 4: You work for a national charity. It appears that it is taking too long for contributions to make their way into your bank account. What suggestions can you make to speed up your collections?

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    Solution Preview

    Part 1: Managers have to plan for the future. Assume your firm is a small to midsize not-for-profit organization and that you rely on the percent of sales method of forecasting. What if any are the short comings of this forecasting technique?
    Why would a cash budget be of particular importance to a firm that experiences seasonal fluctuations in sale?
    According to the wikipedia "Forecasting is the process of estimation in unknown situations." Thus Forecasting means estimating the future values. It is an essential tool in decision making process. The financial forecasts detail the financial aspects of the corporation.

    Components of the forecasting process
    1. Information capture Financial analysts need to collect information, whether it's from internal sources (such as sales data) or external sources (such as data from distribution partners).
    2. Information aggregation You need to aggregate the captured information to support the forecast.
    3. Analysis Using different analytical techniques, you need to analyze the gathered information and synthesize it into a forecast.
    4. Reporting You need to provide the forecast to the appropriate audience in order to support decision-making.

    If financial analysts capture the proper information at the proper time and aggregate the information in a form that drives solid analysis, the result will be a forecast that supports good decision-making.
    Percent of Sales method of forecasting financial statements
    With the percent of sales forecasting method, many items on the income statement and balance sheets are assumed to increase proportionally with sales. As sales increase, these items that are tied to sales also increase, and the values of these items for a particular year are estimated as percentages of the forecasted sales for that year.
    Two examples of spontaneous liability accounts are accounts payable and accrued wages. Additional funds needed (AFN) are those funds required from external sources to increase the firm's assets to support a sales increase. A sales increase will normally require an increase in assets. However, some of this increase is usually met by a spontaneous increase in liabilities as well as by earnings retained in the ...

    Solution Summary

    Cash budgeting for a national charity is discussed.

    $2.19