corporate finance - case study 2

MBA 6023 CORPORATE FINANCE

Case Study Analysis: 30%By A. HARIS AWANG (MBA2016-04-1001)

03rd Dec, 2016

CASE 2 (10%) 03/12/16

Seri Puteri Sdn. Bhd. is a wholesaler. The management of Seri Puteri Sdn. Bhd. has been extremely worried about the company’s cash position over the last few years. In July 2015, they seek your advice and ask you to prepare a cash budget.

The estimated sales for the six months to December 2015 are as follows:

July August September October November December

Credit Sales (RM) 122,000 137,000 142,000 148,000 134,000 126,000

Cash Sales (RM) 12,900 14,500 17,700 20,100 15,000 12,600

Cash is received immediately on cash sales. The company allows customers one month’s credit on sales other than for cash.

Purchase of goods for resale is made on credit. The company receives two months’ credit on these purchases. The purchases for the six months to December 2015 are as follows:

July August September October November December

Purchases (RM) 62,000 58,000 71,000 80,000 54,000 48,000

An inventory check at the end of the last year has revealed RM45,000 of inventory, valued at cost, is considered obsolete. The company is currently negotiating the sale of this inventory for RM9,500 and anticipates payment in November 2015.

Seri Puteri Sdn. Bhd’s manufacturing overheads are estimated to be RM12,000 per month. This includes a charge for depreciation of RM2,000 per month. The company takes one month to pay these expenses.

Selling and distribution expenses are estimated to be RM50,400 per year and are incurred evenly over the year. One month’s credit is taken.

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The company is currently negotiating an advertising programme with an agency. The cost will be RM6,300 in November and RM7,700 in December. Payment will be made in cash.

In December the company anticipates paying RM3,880 tax to Inland Revenue Board (Lembaga Hasil Dalam Negeri).

The company has agreed to purchase new stock handling equipment. The cost of RM105,200 is payable in two equal instalments in October and November 2015.

The company expects in December to be able to take advantage of adjacent property (cost of RM150,000) to expand their operation.

It is estimated that the cash balance at 1 October will be RM16,000.

Required:

a) Prepare a cash budget for the months of October, November and December 2015. (20 marks)

To prepare a cash budget for Oct, Nov and Dec 2015 (Q4), first, a schedule of cash receipts has to be established:

Cash collections for sales under credit is collected 30 days (1 month) after the transaction. So September sales will be reflected under October (RM142,000) and so on.

Second, a schedule of total disbursements is then tabulated:

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Oct Nov DecMaterial purchase (60 days credit):

Aug 58,000 - - Sep - 71,000 - Oct - - 80,000

Direct Labor - - - Overhead 10,000 10,000 10,000 Marketing/advertising - 6,300 7,700 R&D - - - Selling, distribution and admin. 4,200 4,200 4,200 Income Taxes - - 3,880 Equipment 52,600 52,600 - Property Purchase - - 150,000 Total 124,800 144,100 255,780

Seri Puteri Sdn. Bhd.Total Disbursements (RM)

For the 4th Quarter Ended December 31, 2015

Finally, a cash budget is computed taking into account of both cash receipts and total disbursements:

Oct Nov Dec QuarterBeginning cash balance 16,000 53,300 81,700 16,000 Cash collections 162,100 172,500 146,600 481,200 Total cash available 178,100 225,800 228,300 497,200

Total disbursements 124,800 144,100 255,780 524,680 Minimum cash balance - - - - Total cash needs 124,800 144,100 255,780 524,680

Excess (deficiency) of cash 53,300 81,700 (27,480) (27,480) Add: Borrowings - - - - Less: Repayments - - - - Less: Interest paid - - - - Ending cash balance 53,300 81,700 (27,480) (27,480) Plus: Minimum cash balance - - - - Ending cash balance 53,300 81,700 (27,480) (27,480)

Seri Puteri Sdn. Bhd.Cash Budget (RM)


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b) Write a report on the cash position over this period, and in particular on ways in which you think it could be improved.

(10 marks)

From the cash budget, the ending cash balance for the period Q4 (Oct, Nov, Dec), is negative at –RM28,280. Assuming that the company’s fiscal year ending 31st December, it is particularly important to show a positive cash flow as it reflects the financial strength and liquidity of the company. A healthy business needs to maintain a safe level of cash to enable it to carry on business activities. The safe level is to be determined by the management.

However, there are ways to improve the cash position:

i. Negotiation on payment terms: Payment to suppliers can be negotiated to be 90 days credit during bad times. In this particular case study, the cash position is improved as in the following schedules:


Jul 62,000 - - Aug - 58,000 - Sep - - 71,000




Oct Nov DecBeginning cash balance 16,000 49,300 90,700 Cash collections 162,100 172,500 146,600 Total cash available 178,100 221,800 237,300

Total disbursements 128,800 131,100 246,780 Minimum cash balance - - - Total cash needs 128,800 131,100 246,780

Excess (deficiency) of cash 49,300 90,700 (9,480) Add: Borrowings - - - Less: Repayments - - - Less: Interest paid - - - Ending cash balance 49,300 90,700 (9,480) Plus: Minimum cash balance - - - Ending cash balance 49,300 90,700 (9,480)



It has slightly improved from –RM28,280 to –RM9,480. While it is still negative, other forms of improvements can also be concurrently adopted. The downside to this is suppliers may not be able to comply as it is difficult to give 90-day credit term.

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Another way is to negotiate for discounts with suppliers for early payments. This should also help in improving the cash position.

ii. Instalments on property: The cost of RM150,000 on the adjacent property, significantly brings the cash flow into the red as it involves a big chunk of cash over a one month period relative to the business cash flow.

Since it is incurred at the end of the fiscal year, split payments can be negotiated to mitigate the negative cash flow. For example, RM150,000 can be paid in two instalments: RM75,000 in December and another RM75,000 in January the following year. This will get the cash position back into the black.


Aug 58,800 - - Sep - 71,000 - Oct - - 80,000




Oct Nov DecBeginning cash balance 16,000 52,500 80,900 Cash collections 162,100 172,500 146,600 Total cash available 178,100 225,000 227,500

Total disbursements 125,600 144,100 180,780 Minimum cash balance - - - Total cash needs 125,600 144,100 180,780

Excess (deficiency) of cash 52,500 80,900 46,720 Add: Borrowings - - - Less: Repayments - - - Less: Interest paid - - - Ending cash balance 52,500 80,900 46,720 Plus: Minimum cash balance - - - Ending cash balance 52,500 80,900 46,720



iii. Viability study: A thorough study has to be conducted on the viability of the land acquisition. The purchase should be made as close as possible to the operations of the newly acquired property to minimize idling time that only incur losses.

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iv. Offer discounts: For customers who settle their invoices ahead of time, a discount can be offered. This is to incentivize customers who purchase on credit to settle their debts early so the company can have a positive cash flow.

v. Leasing instead of buying: The equipment can be leased instead of purchased. Same with the adjacent property. Being a wholesales, Seri Puteri may need additional warehouse space for logistical purposes i.e. receiving, storage and distribution. So leasing may be an option to improve cash flow. By leasing, the company pays in small increments, which helps improve cash flow.

vi. Loans: No loans necessary as the business can sustain a positive cash flow if managed properly.

[TOTAL = 30 MARKS]-END-

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corporate finance - case study 2

Economy & Finance