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Homework answers / question archive / The XYZ company specializes in homemade biscuits and receives all income from sales

The XYZ company specializes in homemade biscuits and receives all income from sales

Finance

The XYZ company specializes in homemade biscuits and receives all income from sales. The sales revenue estimates (in million $) for the company are as follows:

Q1 = 500, Q2 = 550, Q3 = 600, Q4 = 650 and Q1 of next year = 650. The average collection period for accounts receivables is 60 days. Beginning receivables (Q1 beginning) is $200 million. The purchases are 50% of next quarter sales. Beginning payables (Q1 beginning) is $150 million. The accounts payable period is 30 days.

Wages and other expenses every quarter are 20% of the sales revenue of that quarter. A CAPEX of $50 is planned end of Quarter 3. Dividends and interest payments are $10 million every quarter. There are no other expenses. The beginning cash balance (Q1 beginning) is $30 million.

How much will be the cash balance at the end of Quarter 4?

XYZ company wants to maintain a cash balance of $35 million every quarter. Will there be any cash deficit in any quarter ?

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Please see the table below. All financials are in $ million. Please see the second column to understand the mathematics.

  Linkage Q1 Q2 Q3 Q4 Q1 next year
Sale A                500.00               550.00           600.00              650.00             650.00
Beginning receivables B                200.00               333.33           366.67              400.00  
Closing receivables C = 2/3 x A                333.33               366.67           400.00              433.33  
Purchases D = 50% x A of next quarter                275.00               300.00           325.00              325.00  
Begining payables E                150.00                 91.67           100.00              108.33  
Closing payables F = 1/3 x D                  91.67               100.00           108.33              108.33  
             
Collections G = A + B - C                366.67               516.67           566.67              616.67  
[-] Payments H = D + E - F                333.33               291.67           316.67              325.00  
[-] Wages & other expenses I = 20% x A                100.00               110.00           120.00              130.00  
[-] Capex J                 50.00    
[-] Dividend & interest payment K                  10.00                 10.00             10.00                10.00  
Net cash flows L = G - H - I - J - K                -76.67               105.00             70.00              151.67  
Opening balance M                  30.00                -46.67             58.33              128.33  
Closing balance L + M                -46.67                 58.33           128.33              280.00  

Cash balance at the end of Q4 = 280.00

The closing balance of Q1 is lower than the required threshold. Hence, there will be a cash deficit in Q1

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