COULD YOU PLEASE HELP ME ANSWER DEERPARK CASH BUDGETING CASE 15 IN FINANCIAL MANAGEMENT CASES EDITION II

CASEI 5 DEERPARK CASH BUDGETING "My instincts tell me that we could have cash flow problems sometime in the next six months, Patrick Harding the manager of Deerpark, a West Virginia resort, says to Lambert Purcell, the assistant manager. "I need to know now what we're dealing with and I think I'd better redo the forecast. CASH FLOW CONCERNS Three months ago Harding had prepared a cash flow forecast for the perio October 1995 to May 1996. November through March is generally a slow period for the resort, and it is not unusual for the lodge to run cash deficits during most, if not all, of these months. However, the cash surplus generated during the peak period, from August through October, is typically sufficient to meet the shortfall. This is precisely what Harding had predicted would occur when he had made the cash budget projection in July. But now, in early October, he is having second thoughts about the forecast. Three factors conc need to be mo ern Harding. First, the renovations planned for January re extensive than originally thought. Harding had estimated the cost to be $420,000, but it appears $500,000 of work is necessary. Second, the resort's long-time sales manager left unexpectedly in August and h er replace- ent does not seem to be as effective in obtaining convention business. Third a recession has hit much of the area and Deerpark's sales are definitely sensi- tive to the state of the regional economy. All this suggests Harding's sales forecasts, which he had labeled "conservative" in July, are too high. "I can see indications of this now," he tells Purcell. "Revenue is off 10 percent for September and October, and our advance bookings for the rest of the year are also down. I'm sure we won't hit the levels we predicted." Harding has always been an advocate of cash budget forecasts and constantly revises an estimate in information. There is no doubt a new projection is necessary CASE 15 DEERPARK 91 QUESTIONS 1. Should the resort's depreciation expense of $30,000 per month be consid- ered in your cash budget? Explain. 2. Prepare a cash budget for the period October through March. 3. Is there any advantage to extending the forecast through April and May? Explain. 4. Let's assume Deerpark's cash flow would not be sufficient to cover any shortfall occurring during the October-through-March period. What amount of payables must be deferred to get the resort through this period? 5. Harding in essence will be asking the firm's vendors for a loan. From Deerpark's point of view, the size of the loan is your answer to question 4. From the suppliers' point of view, however, the size of their investment in the loan is actually less than that amount. Explain why. (Hint: The price charged will reflect the suppliers' costs plus profit, and costs are the sum of fixed and variable costs). 6. Do Deerpark's purveyors have an incentive to cooperate? Explain. 7. If the purveyors are unable or unwilling to cooperate, how do you think 8. Which do you think is more likely to revise a cash budget: a firm like 9. What do you think is the most important variable in a cash budget forecast? 10. Do you think that a cash budget is a more important financial tool for Harding should proceed? Deerpark or an electric utility? Explain. Why? a small firm like Deerpark or a large firm like Exxon? Explain. SOFTWARE QUESTION 11. Patrick Harding, the resort's manager, is convinced that the estimates used to develop the October-March cash budget are as accurate as he can make them. Thus, he intends to ask the resort's purveyors for an extension of $285,700. He intends to pay COD (cash on delivery) effective April and will use any surplus monthly cash to repay the purveyors. The purveyors have indicated in preliminary conversations that they are willing to cooperate. In order to help their planning, however, they would like Harding to estimate how much of the $285,700 will be paid in April, how much in May, etc