Toy World –
Toy World –Page 230Page 230
Solution to T
Solution to To
oy W
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orld, Inc.
d, Inc.
Case 32A
Case 32A ToToy Wy World, Inc. orld, Inc. Cash BudgetingCash Budgeting
Copyright
Copyright�� 1996 by the Dryden Press. 1996 by the Dryden Press. All righAll rights reserved.ts reserved.
CASE
CASE INFO!ATINFO!ATIONION PURPO!
PURPO!
"his #ase analy$es a straight%
"his #ase analy$es a straight%or&ard #ash b'dgetior&ard #ash b'dgeting proble(. ng proble(. )t is designed to ill'strate)t is designed to ill'strate the (e#hani#s o% a
the (e#hani#s o% a #ash b'dget and the #ash b'dget and the &ay #ash b'dgets are &ay #ash b'dgets are 'sed. 'sed. Dis#'ssion *'estionsDis#'ssion *'estions %o#'s on the rationale behind the 'se o% #ash b'dgets as &ell as on their inherent %o#'s on the rationale behind the 'se o% #ash b'dgets as &ell as on their inherent proble(s.
proble(s. "he #ase "he #ase also raises also raises the iss'es the iss'es o% the o% the target #ash balan#e+ target #ash balan#e+ the opti(al the opti(al si$e o% si$e o% the #redit line+ the invest(ent o% e,#ess #ash+ and prod'#tion s#hed'ling %or a seasonal the #redit line+ the invest(ent o% e,#ess #ash+ and prod'#tion s#hed'ling %or a seasonal b'siness.
b'siness.
")-! R!U)R!D ")-! R!U)R!D
/itho't 'sing the (odel+ 3 ho'rs o% st'dent preparation sho'ld be ade*'ate %or (ost /itho't 'sing the (odel+ 3 ho'rs o% st'dent preparation sho'ld be ade*'ate %or (ost st'dents+ &ith possibly another ho'r or so to &rite 'p the #ase i% it ('st be handed in. st'dents+ &ith possibly another ho'r or so to &rite 'p the #ase i% it ('st be handed in. Use o% the spreadsheet (odel #an greatly red'#e preparation ti(e+ espe#ially i% the Use o% the spreadsheet (odel #an greatly red'#e preparation ti(e+ espe#ially i% the #o(pleted (odel or the easy (a#ro version is given to st'dents.
#o(pleted (odel or the easy (a#ro version is given to st'dents. CO-P!)"4
CO-P!)"4
A relatively si(ple+ b't &ith a %air a(o'nt o% n'(ber #r'n#hing %or st'dents not 'sing the A relatively si(ple+ b't &ith a %air a(o'nt o% n'(ber #r'n#hing %or st'dents not 'sing the spreadshe
spreadsheet (odel. et (odel. 5o&ever5o&ever+ a n'(ber o% related iss'+ a n'(ber o% related iss'es #an be dis#'ssees #an be dis#'ssed+ so st'dentsd+ so st'dents #an p't in a signi%i
#an p't in a signi%i#an#ant a(o'nt o% ti(e on the #aset a(o'nt o% ti(e on the #ase. . tiltill+ they #an get the gist o% itl+ they #an get the gist o% it &itho't too ('#h tro'ble.
&itho't too ('#h tro'ble.
/A4 /! 5A! U!D "5! CA! /A4 /! 5A! U!D "5! CA! /e h
/e have 'sed this #ase in t&o very di%%erent &ays. ave 'sed this #ase in t&o very di%%erent &ays. 7irst+ &ith both introd'#to7irst+ &ith both introd'#tory and notry and not very&ellprepared se#ond #o'rse st'dents+ &e as8 the( to read the #ase and to be#o(e very&ellprepared se#ond #o'rse st'dents+ &e as8 the( to read the #ase and to be#o(e generally %a(iliar &ith it+ and then &e go thro'gh the #ase in #lass in lie' o% a le#t're to generally %a(iliar &ith it+ and then &e go thro'gh the #ase in #lass in lie' o% a le#t're to ens're that st'd
ens're that st'dents see the iss'eents see the iss'es involved. s involved. /hen &e 'se the #ase in th/hen &e 'se the #ase in this (anner+ &eis (anner+ &e al&ays assign th
al&ays assign the dire#ted versie dire#ted version. on. "he *'esti"he *'estions in the dire#teons in the dire#ted version lead st'dend version lead st'dentsts thro'gh the topi#
thro'gh the topi#s &e &ant to address+ and they provide str'#s &e &ant to address+ and they provide str'#t're to the #lass. t're to the #lass. "he #ase"he #ase itsel% sets the #onte,t in &hi#h all #al#'lations and de#isions are (ade+ and this o%ten itsel% sets the #onte,t in &hi#h all #al#'lations and de#isions are (ade+ and this o%ten &or8s better than a p're le#t're be#a'se the #ase (a8es the (aterial see( (ore &or8s better than a p're le#t're be#a'se the #ase (a8es the (aterial see( (ore relevant
relevant. . /e /e parti#'lparti#'larly li8e this 'sage &ith evening st'darly li8e this 'sage &ith evening st'dents and:or e,e#'ents and:or e,e#'tives andtives and (anagers.
(anagers. /i/ith (ore advath (ore advan#ed st'den#ed st'dents+ &e assignts+ &e assign the #ase tn the #ase to 2 perso 2 person tea(s. on tea(s. OneOne tea( is as8ed to present their %ind
tea( is as8ed to present their %indings and #on#l'siings and #on#l'sions to the #lass+ and ons to the #lass+ and the other tea(sthe other tea(s are as8ed to prepare &ritten reports ;< page (a,i('( %or te,t+ pl's e,hibits=.
are as8ed to prepare &ritten reports ;< page (a,i('( %or te,t+ pl's e,hibits=. /e /e as8 theas8 the st'dents to play the role o% internal or e,ternal #ons'ltants+ reporting to (anage(ent. st'dents to play the role o% internal or e,ternal #ons'ltants+ reporting to (anage(ent. /hen the #ase is assigned in this (anner+ &e highly re#o((end the nondire#ted /hen the #ase is assigned in this (anner+ &e highly re#o((end the nondire#ted version.
version. /i/ith the dire#ted versith the dire#ted version+ the presentaton+ the presentation and reports are too (e#hion and reports are too (e#hani#alani#al st'dents >'st ans&er the
st'dents >'st ans&er the spe#i%i# *'estions. spe#i%i# *'estions. /ith /ith the nondire#ted version+ st'dents the nondire#ted version+ st'dents havehave (ore s#ope to #onsider di%%erent things+ and to 'se di%%erent n'(bers in arriving at their (ore s#ope to #onsider di%%erent things+ and to 'se di%%erent n'(bers in arriving at their ans&ers.
ans&ers. "his (a8es thing"his (a8es things (ore interestins (ore interesting+ and dis#'ssions a(og+ and dis#'ssions a(ong the st'dents areng the st'dents are (ore li8ely to arise.
Toy World –Page 231
)n either type 'sage+ &e tell st'dents to read the relevant #hapter in their te,tboo8 in #on>'n#tion &ith &or8 on the #ase. ;O'r st'dents are as8ed to have a standard %inan#e te,tboo8 %or re%eren#e in the #o'rse. o(e te,ts &or8 better than others %or re%eren#e p'rposes+ b't all te,ts #over the (aterial in this and other #ases.= /e also tell st'dents that in this #ase+ as in the real &orld+ they (ay not be provided all the data and other in%or(ation they &o'ld li8e. "hen &e tell the( that i% an iss'e is addressed in the te,t #hapter that see(s relevant to the #ase+ b't no data is provided in the #ase+ that &e &ill give the( bro&nie points %or dis#'ssing ho& they+ as #ons'ltants+ &o'ld go abo't getting the (issing data and then 'sing it+ and &e en#o'rage the( to (a8e 'p realisti# data and then analy$e it &ithin the #onte,t o% the #ase. "his so(eti(es %or#es st'dents to thin8 abo't di%%i#'lt b't relevant iss'es+ and it really opens things 'p in ter(s o% giving the( s#ope %or digging into the s'b>e#t. /e have had st'dents loo8 'p %'t'res (ar8et data+ yield #'rve data+ and so %orth. O% #o'rse+ &e have had other st'dents &ho >'st do the (ini('( a(o'nt o% &or8 #alled %or dire#tly in the #ase. ?'t the nondire#ted #ase does give st'dents s#ope to go on &ith e,tra &or8 i% they &ant to.
@O@D)R!C"!D CA! ")P
"his #ase #o(es in both dire#ted and nondire#ted versions. )% yo' are 'sing the non dire#ted versionthe version &itho't endo%#ase *'estionyo'r st'dents &ill re#eive general g'idan#e in the #ase+ b't they &ill not have a spe#i%i# list o% *'estions to ans&er. "h's+ the %irst step that st'dents ('st ta8e in solving the nondire#ted version o% this #ase is to develop a sol'tion strategy. "hen+ they ('st e,e#'te their strategy to arrive at a #ase sol'tion.
/hen &e 'se the nondire#ted version o% this #ase+ &e tend to give st'dents a great deal o% latit'de. O% #o'rse+ &e e,pe#t all st'dents to do a #redible >ob o% #reating the base #ase. ?eyond that+ ho&ever+ &e tend to (ost re&ard those st'dents that dig deepest into the #ase and thereby dis#over that there is a lot (ore s'b>e#tivity to #apital b'dgeting #ash %lo& analysis than %irst appears. As in the real &orld+ &e re&ard innovation and #reativity (ore that (ere (i(i#ry+ ass'(ing o% #o'rse that so'nd %inan#ial prin#iples are not violated.
in#e the dire#ted and nondire#ted versions o% this #ase are very si(ilar+ the sol'tion to the dire#ted version that &e present here provides an e,#ellent prototype sol'tion to the nondire#ted version. )n %a#t+ &e %ollo& the dire#ted #ase sol'tion &hile st'dents are (a8ing #lass presentations o% their sol'tions to the nondire#ted #ase. /e then raise those iss'es that st'dents (iss in their analysis either d'ring or a%ter the presentation. )n that &ay+ &e ens're that the (ain points o% the #ase are #overed.
)@"RUC"OR PR!PARA")O@
Regardless o% &hi#h version yo' 'se+ &e re#o((end that yo' read thro'gh the #ase and then read thro'gh the *'estions and ans&ers provided in this sol'tion. "he *'estions are %ro( the dire#ted #ase+ and they to'#h on (ost o% the points that o##'rred to 's and that st'dents are li8ely to bring 'p &hen they go thro'gh the #ase. Obvio'sly+ other points #o'ld be (ade+ b't the *'estions and ans&ers &ill give yo' a good idea o% ho& &e deal &ith the #ase.
Toy World –Page 232
!O"E# INFO!ATION D!CR)P")O@
"he spreadsheet (odel %or this #ase+ %ilena(e CA!32A)+ #reates both a (onthly and a daily b'dget on the basis o% a set o% inp't variables. @ote that all per#entages ('st be entered in their de#i(al %or(. "he -OD!!@!RA"!D DA"A se#tion is #al#'lated in a relatively straight%or&ard (anner no #o(ple, e*'ations or (anip'lations are 'sed. "he only potential #on%'sion &o'ld probably o##'r in the e,pe#ted sales vers's the reali$ed sales se#tion. 5ere &e have based #olle#tions on reali$ed sales+ b't e,penses are #al#'lated 'sing e,pe#ted sales. "his has the e%%e#t o% (a8ing all e,penses %i,ed &ith respe#t to %ore#asted sales regardless o% reali$ed sales+ &hi#h is the ass'(ption 'sed in 'estion 9. "he )@PU" DA"A and B!4 OU"PU" se#tions are sho&n belo&
)@PU" DA"A B!4 OU"PU"
Pro>e#ted ales Cost Data @et Cash 7lo&
199< ariable #osts an ;E2F9+100=
@ov EF00+000 -aterials 30G 7eb EH9+0<0
De# 92<+000 ;G paid be%ore sale= -ar ;E131+960=
1996 2 (onths prior 60G Apr ;E93+F2<=
an E<00+000 1 (onth prior 0G -ay ;E190+00=
7eb 300+000 abor 0G 'n ;E32+000=
-ar 2F0+000 ;G paid be%ore sale=
Apr 22<+000 2 (onths prior <0G C'( ;oan=
-ay 200+000 1 (onth prior <0G or 'rpl's
'ne 2<0+000 an E2F9+100
'l 3<0+000 7i,ed Costs 7eb E36F+1<0
A'g 00+000 -onthly -ar E236+190
en:ad(in e,pense E9<+000 Apr E12+36<
ales as G ease pay(ent 60+000 -ay ;EF+03<=
o% %ore#ast 100G Depre#iation H+<00 'n ;EF0+03<= -is# e,pense 0+000
Cash ?alan#e Data
'arterly
"gt balan#e E<0+000 "a,es E90+000 ?eg #ash <0+000
e(iann'ally
Colle#tions Data )nterest EF0+000
Dis# period 1< 'ne only
Dis# G 2.0G @e& e*'ip(ent E100+000 G ta8ing dis# 3<G
@et period 30 G #'sto(ers 60G ate period 60 G paying late <G
Ta$le %& !onthly Cash Budget Wor'sheet
). CO!C")O@ A@D PA4-!@"
@ove(ber De#e(ber an'ary 7ebr'ary -ar#h April -ay 'ne ross sales ;e,pe#ted= EF00+000 E92<+000 E<00+000 E300+000 E2F0+000 E22<+000 E200+000 E2<0+000 ross sales ;reali$ed= EF00+000 E92<+000 E<00+000 E300+000 E2F0+000 E22<+000 E200+000 E2<0+000 Colle#tions
-onth o% sale E2H+00 E31H+2H< E1H1+<00 E102+900 E96+00 EHH+1H< E6F+600 EF<+H<0 1 (onth a%ter sale F0+000 <<<+000 300+000 1F0+000 16F+000 13<+000 120+000 2 (onths a%ter sale 0+000 6+2<0 2<+000 1<+000 1+000 11+2<0
"otal #olle#tions EH66+<00 E9+1<0 E301+00 E260+1H< E21H+600 E21H+000 P'r#hases E1<0+000 E90+000 EF+000 E6H+<00 E60+000 EH<+000 E10<+000 E120+000 Pay(ents
2 (os prior to sale 90+000 <+000 <0+00 0+<00 36+000 <+000 63+000 H2+000 1 (o prior to sale 60+000 36+000 33+600 2H+000 2+000 30+000 2+000
Toy World –Page 23
Ta$le % (continued)
)). CA5 A)@ OR O 7OR -O@"5
an'ary 7ebr'ary -ar#h April -ay 'ne Colle#tions EH66+<00 E9+1<0 E301+00 E260+1H< E21H+600 E21H+000 Pay(ents
P'r#hases EF6+00 EH+100 E63+000 E69+000 E93+000 E11+000 abor
2 (os prior to sale <6+000 <+000 0+000 <0+000 H0+000 F0+000 1 (o prior to sale 60+000 <6+000 <+000 0+000 <0+000 H0+000 eneral: ad(inistrative e,p 9<+000 9<+000 9<+000 9<+000 9<+000 9<+000 ease 60+000 60+000 60+000 60+000 60+000 60+000 -is#ellaneo's e,penses 0+000 0+000 0+000 0+000 0+000 0+000
"a,es 90+000 90+000
)nterest ;on bonds= F0+000
@e& e*'ip(ent 100+000
"otal pay(ents EHH+00 E3H0+100 E33+000 E3<+000 E0F+000 E69+000 @et #ash gain ;loss= E2F9+100 EH9+0<0 ;E131+960= ;E93+F2<= ;E190+00= ;E32+000=
))). CA5 URPU OR OA@ R!U)R!-!@"
an'ary 7ebr'ary -ar#h April -ay 'ne Cash at start i% no borro&ing is done E<0+000 EH39+100 EF1F+1<0 E6F6+190 E<92+36< E01+96< C'('lative #ash EH39+100 EF1F+1<0 E6F6+190 E<92+36< E01+96< ;E30+03<= "arget #ash balan#e <0+000 <0+000 <0+000 <0+000 <0+000 <0+000 'rpl's #ash or total loans
Toy World –Page 23<
Ta$le 2& "aily Cash Budget Wor'sheet
). CO!C")O@ A@D PA4-!@" target #ash balan#e
Day 1 2 < 6 1< 16 31
ross sales E16+129 E16+129 E16+129 E16+129 E16+129 E16+129 E16+129 Colle#tions
Dis#o'nt payers E10+23< E10+23< E10+23< E10+23< E10+23< E<+<32 E<+<32 @et payers 1H+903 1H+903 1H+903 1H+903 1H+903 1H+903 9+6HH ate payers 1+333 1+333 1+333 1+333 1+333 1+333 1+92 "otal #olle#tions E29+H1 E29+H1 E29+H1 E29+H1 E29+H1 E2+H69 E16+H02 P'r#hases EF+000
Pay(ents
2 (os prior to sale <0+00 1 (o prior to sale 36+000
Toy World –Page 236
Ta$le 2 (continued)
)). CA5 A)@ OR O 7OR DA4
Day 1 2 < 6 1< 16 31 Colle#tions E29+H1 E29+H1 E29+H1 E29+H1 E29+H1 E2+H69 E16+H02 Pay(ents
P'r#hases EF6+00
abor
2 (os be%ore sale E2F+000 E2F+000
1 (o be%ore sale 30+000 30+000
eneral: ad(in e,pense H+<00 H+<00 ease 60+000
-is# e,penses 1+290 1+290 1+290 1+290 1+290 1+290 1+290 "a,es
)nterest ;on bonds= F0+000
"otal pay(ents E166+H90 E1+290 EFH+690 E1+290 E1F6+H90 E1+290 E1+290 @et #ash gain ;loss= ;E13H+319= E2F+1F1 ;E<F+219= E2F+1F1 ;E1<H+319= 23+HF E1<+11
))). CA5 URPU OR OA@ R!U)R!-!@"
Day 1 2 < 6 1< 16 31 Cash at start i% no
borro&ing is done E<0+000 E312+6F1 E39H+22 E339+00< E<92+633 E3<+31 EHFH+6<0 C'('lative #ash E312+6F1 E30+F62 E339+00< E36H+1F< E3<+31 E<F+H92 EF03+061 "arget #ash balan#e <0+000 <0+000 <0+000 <0+000 <0+000 <0+000 <0+000 'rpl's #ash or total loans
o'tstanding to (aintain
Toy World –Page 23H
Ta$le 3& !onthly Cash Budget Wor'sheet Including Interest Inco*e+ E-ense
). CO!C")O@ A@D PA4-!@"
@ove(ber De#e(ber an'ary 7ebr'ary -ar#h April -ay 'ne ross sales ;e,pe#ted= EF00+000 E92<+000 E<00+000 E300+000 E2F0+000 E22<+000 E200+000 E2<0+000 ross sales ;reali$ed= EF00+000 E92<+000 E<00+000 E300+000 E2F0+000 E22<+000 E200+000 E2<0+000 Colle#tions
-onth o% sale E2H+00 E31H+2H< E1H1+<00 E102+900 E96+00 EHH+1H< E6F+600 EF<+H<0 1 (onth a%ter sale F0+000 <<<+000 300+000 1F0+000 16F+000 13<+000 120+000 2 (onths a%ter sale 0+000 6+2<0 2<+000 1<+000 1+000 11+2<0
"otal #olle#tions EH66+<00 E9+1<0 E301+00 E260+1H< E21H+600 E21H+000 P'r#hases E1<0+000 E90+000 EF+000 E6H+<00 E60+000 EH<+000 E10<+000 E120+000 Pay(ents
2 (os prior to sale 90+000 <+000 <0+00 0+<00 36+000 <+000 63+000 H2+000 1 (o prior to sale 60+000 36+000 33+600 2H+000 2+000 30+000 2+000
Toy World –Page 23F
Ta$le 3 (continued)
)). CA5 A)@ OR O 7OR -O@"5
an'ary 7ebr'ary -ar#h April -ay 'ne Colle#tions EH66+<00 E9+1<0 E301+00 E260+1H< E21H+600 E21H+000 Pay(ents
P'r#hases EF6+00 EH+100 E63+000 E69+000 E93+000 E11+000 abor
2 (os prior to sale <6+000 <+000 0+000 <0+000 H0+000 F0+000 1 (o prior to sale 60+000 <6+000 <+000 0+000 <0+000 H0+000 eneral: ad(in e,pense 9<+000 9<+000 9<+000 9<+000 9<+000 9<+000 ease 60+000 60+000 60+000 60+000 60+000 60+000 -is#ellaneo's e,penses 0+000 0+000 0+000 0+000 0+000 0+000
"a,es 90+000 90+000
)nterest ;on bonds= F0+000
@e& e*'ip(ent 100+000
"otal pay(ents EHH+00 E3H0+100 E33+000 E3<+000 E0F+000 E69+000 hort ter( interest paid or re#eived 1+210 1+<< 1+000 611 ;2<6= ;2+H93= @et #ash gain ;loss= E290+310 EF0+<9< ;E130+960= ;E93+21= ;E190+6<6= ;E3+H93=
))). CA5 URPU OR OA@ R!U)R!-!@"
an'ary 7ebr'ary -ar#h April -ay 'ne Cash at start i% no borro&ing is done E<0+000 EH0+310 EF20+90< E6F9+9< E<96+H31 E06+0H< C'('lative #ash EH0+310 EF20+90< E6F9+9< E<96+H31 E06+0H< ;E 2F+H1F= "arget #ash balan#e <0+000 <0+000 <0+000 <0+000 <0+000 <0+000 'rpl's #ash or total loans
o'tstanding to (aintain
Toy World –Page 239
-OD! U!
"his #ase ill'strates the typi#al steps involved in a #ash b'dget analysis. "his ne#essarily involves a n'(ber o% n'(eri#al #al#'lations+ so(e o% &hi#h are repetitive b'sy &or8. 7or that reason+ &e s'ggest that so(e %or( o% the partial (odel be provided to st'dents i% #o(p'ter %a#ilities are available. ?eyond the *'estions provided in the #ase+ st'dents #o'ld be re*'ired to develop e,tensive &hati% analyses. "he #al#'lations are trivially easy &hen the (odel is 'sed+ b't terribly ti(e #ons'(ing i% done by hand. "his
per(its the st'dents ;1= to see the e,tre(e 'se%'lness o% (odels and ;2= to get so(e 'se%'l insights into #ash b'dgeting per se.
/ESTIONS AN" ANSWES
%. Constr'#t a (onthly #ash b'dget %or "oy /orld %or the period an'ary thro'gh 'ne 1996. 7or p'rposes o% this *'estion+ disregard both interest pay(ents on shortter( ban8 loans and interest re#eived %ro( investing s'rpl's %'nds. Also+ ass'(e that all #ash %lo&s o##'r on the 1<th o% ea#h (onth. 7inally+ note that #olle#tions %ro( sales in @ove(ber and De#e(ber o% 199< &ill not be #o(pleted 'ntil an'ary and 7ebr'ary o% 1996+ respe#tively. ;5int Use "able 1 as a g'ide.= )% yo' have a##ess to the spreadsheet (odel+ #o(plete it to generate the re*'ired n'(bers. /hat is the (a,i('( %'nds short%all d'ring the 6(onth planning periodI
Ans0er&
@et #ash gains are pro>e#ted %or the an'ary and 7ebr'ary+ re%le#ting the e%%e#t o% the high &inter holiday sales. "he (a,i('( %'nds re*'ire(ent is EF0+03< in 'ne.
2. Ass'(e that the ban8 &ill give "oy /orld a E<00+000 line o% #redit. /ill this be s'%%i#ient to #over all e,pe#ted #ash short%allsI 'ppose the ban8 re%'sed to grant the loan+ and th's the #o(pany had to obtain shortter( %inan#ing %ro( other so'r#es. /hat other so'r#es (ight be availableI
Ans0er&
A##ording to the pro>e#tions th's %ar+ "oy /orldJs E<00+000 line o% #redit sho'ld be s'%%i#ient to #over its anti#ipated #ash needs. ;ee the 'rpl's #ash or loans o'tstanding line o% "able 1.= 5o&ever+ the line o% #redit has only a per#ent (argin o% sa%ety above 'neJs pea8 need. "here is no reason to thin8 that the ban8 &ill not a##o((odate "oy /orld+ b't i% alternative %inan#ing is re*'ired+ "oy /orld &o'ld have a n'(ber o% alternatives. 7irst+ it (ight negotiate to red'#e its #ash balan#e+ &hi#h &o'ld lo&er the loan re*'ire(ent. Also+ it (ight start paying its s'ppliers (ore slo&ly+ th's stret#hing its trade #reditK this &o'ld be parti#'larly %easible i% the #o(pany is #'rrently ta8ing dis#o'nts. 7a#toring or pledging a##o'nts re#eivable+ or pledging inventories+ &o'ld also be &orth
#onsidering. Co((er#ial paper (ight also be 'sed+ b't that (ay not be %easible given the si$e o% the #o(pany and the %a#t that the ability to obtain ban8 #redit is a prere*'isite to a##essing the #o((er#ial paper (ar8et. )% &orse #a(e to &orse+
Toy World –Page 20
the #o(pany (ight sell #o((on sto#8 to strengthen its %inan#ial position and i(prove its #han#es o% obtaining #redit. till+ given the %a#ts as set %orth in the #ase+ the ban8 &o'ld probably grant the re*'ested #redit.
3. "he (onthly #ash b'dget yo' have prepared ass'(es that all #ash %lo&s o##'r on the 1<th o% ea#h (onth. 'ppose "oy /orldLs o't%lo&s tend to #l'ster at the beginning o% the (onth+ &hile #olle#tions tend to be heaviest to&ard the end o%
ea#h (onth. 5o& &o'ld this a%%e#t the validity o% the (onthly b'dgetI /hat #o'ld be done to #orre#t any ina##'ra#ies that (ight res'lt %ro( the (is(at#h o% in%lo&s and o't%lo&sI
Ans0er&
)n a sit'ation &here #ash in%lo&s and o't%lo&s do not o##'r at the sa(e rate thro'gho't the (onth+ a (onthly #ash b'dget does not a##'rately predi#t %inan#ing re*'ire(ents. "a8e this si(ple e,a(ple as an ill'stration A ne&ly %or(ed %ir( ('st pay E10+000 o% total e,penses on -ar#h 1+ and it &ill #olle#t E20+000 in total re#eipts on -ar#h 30. A (onthly #ash b'dget &o'ld sho& that no ban8 loan &o'ld be re*'ired+ be#a'se an e,#ess o% E10+000 in #ash &ill o##'r d'ring -ar#h. 5o&ever+ it is obvio's that there &ill be no -ar#h #olle#tions to pay the bills d'e on the %irst o% the (onth. )% "oy /orldJs #olle#tions &ere #l'stered at the end o% the (onth+ &hile its o't%lo&s &ere heaviest at the beginning+ its (onthly #ash b'dget &o'ld 'nderstate its need %or %'nds. "h's+ it is possible that (onthly b'dgets #an be de#eiving. 7or this reason+ (onthly #ash b'dgets are generally 'sed %or planning p'rposes+ b't a daily #ash b'dget is 'sed %or a#t'al #ash #ontrol )% "oy /orldJs #ash %lo&s %it the s#enario depi#ted above+ then a daily #ash b'dget &o'ld be absol'tely essential to ens're that the ne#essary #ash is on hand and that loan #o((it(ents are ade*'ate to (eet a#t'al needs. /e develop a daily #ash b'dget in the ne,t *'estion.
1. @o& ass'(e that yo' and ra#e de#ide to develop a daily #ash b'dget %or the (onth o% an'ary+ 'sing "able 2 as a g'ide. )% yo' #al#'lated the (onthly #ash b'dget as #alled %or in 'estion 1 #orre#tly+ yo' sho'ld have %o'nd a #ash s'rpl's
o% E2F9+100 in an'ary. Does the daily #ash b'dget agree &ith this #on#l'sionI Ans0er&
"he daily #ash b'dget is s'((ari$ed in "able 2. 5ere are so(e inp'ts 'sed in developing the daily b'dget
an'aryJs daily sales M E<00+000:31 days M E16+129. Dis#o'nt ales Re#eipts d'ring an'ary 11<
%ro( De#e(ber sales M ;E92<+000:31=;0.3<=;0.9F= M E10+23< per day. Dis#o'nt ales Re#eipts
Toy World –Page 21
@et 30 ales Re#eipts
%ro( De#e(ber ales M ;E92<+000:31=;0.60= M E1H+903 per day %or an'ary 130.
@et 30 ales Re#eipts
%ro( an'ary ales M ;E<00+000:31=;0.60= M E9+6HH on an'ary 31. ate ales Re#eipts
%ro( @ove(ber ales M ;EF00+000:30=;0.0<=
M E1+333 per day %or an'ary 129. ate ales Re#eipts
%ro( De#e(ber ales M ;E92<+000:31=;0.0<= M E1+92 on an'ary 3031.
Daily "otal Re#eipts an'ary 11< M E10+23< N E1H+903 N E1+333 M E29+H1. an'ary 1629 M E<+<32 N E1H+903 N E1+333 M E2+H69. an'ary 30 M E<+<32 N E1H+903 N E1+92 M E2+92H. an'ary 31 M E<+<32 N E9+6HH N E1+92 M E16+H02. ?ased on the #ash b'dget sho&n in "able 2+ &e see that a loan o% E13H+319 &ill be re*'ired on an'ary 1 vers's the s'rpl's o% E2F9+100 sho&n on the (onthly #ash b'dget. "his res'lt o##'rs be#a'se #ash o't%lo&s o##'r pri(arily on the 1st and
the 1<th+ &hereas in%lo&s o##'r 'ni%or(ly d'ring the (onth. ?y the end o% the (onth+ the s'rpl's balan#e &ill be 'p to E3<2+902.
;Note& "he di%%eren#e bet&een the E3<2+902 endo%(onth s'rpl's in the daily b'dget and the E2F9+100 in the (onthly b'dget res'lts %ro( the ass'(ption+ in
the daily b'dget+ that #olle#tions o% dis#o'nt sales are %ro( De#e(ber sales+ not an'ary sales+ d'ring the %irst 1< days+ and also be#a'se #olle#tions o% net sales and late sales on an'ary 31 are %ro( an'ary sales and De#e(ber sales+ respe#tively.=
. "hin8 abo't the (e#hani#s o% the ban8 loan. D'ring a typi#al (onth+ the %'nds needed or #ash s'rpl's &o'ld be #hanging daily. As ban8s typi#ally operate+ #o'ld the #o(pany in#rease or de#rease its loan on a daily basisI /o'ld the #o(pany &ant to do so i% it #o'ldI
Ans0er&
@or(ally+ #o(panies 'se revolving #redit lines &hi#h per(it the( to borro& or repay loans on a daily basis+ so the loan balan#e #o'ld and &o'ld in#rease or de#rease daily. 7'rther+ interest is #harged on a daily basis+ on the balan#e at the #lose o% the b'siness day. "here%ore+ it pays a #o(pany to 'se e,#ess #ash %lo&s to pay do&n loans+ ass'(ing the #ost o% the loan e,#eeds the rate earned on (ar8etable se#'rities. )% a #o(pany #o'ld not #hange its loan balan#e daily+ then it &ill have to obtain a loan at the beginning o% ea#h (onth s'%%i#iently large to #over its e,pe#ted pea8 #ash re*'ire(ents.
Toy World –Page 22
. 4o' are a&are that Dan is #on#erned abo't the e%%i#ient 'tili$ation o% his %ir(Ls #ash reso'r#es. pe#i%i#ally+ he has *'estioned &hether or not seasonal variations sho'ld be in#orporated into the target balan#e. "hat &o'ld (ean that d'ring (onths &hen #ash needs are greatest+ the target balan#e &o'ld be so(e&hat higher+ &hile the target &o'ld be set at a lo&er level d'ring sla#8 (onths. /o'ld yo' re#o((end that "oy /orld %ollo& this strategyI )% the %ir( had #o(pensating balan#e re*'ire(ents+ &o'ld this a%%e#t yo'r ans&erI 5o& &o'ld a variable target balan#e be in#orporated into the (onthly #ash b'dgetI 5o& &o'ld it be in#orporated into the daily #ash b'dgetI
Ans0er&
D'ring the (onths o% heavy sales and prod'#tion+ &hen #ash needs are greatest+ "oy /orld &o'ld need a larger target #ash balan#e+ hen#e (ore %inan#ing %ro( the ban8 or other so'r#es. 5o&ever+ d'ring slo&er (onths+ "oy /orldJs lo&er target balan#e &o'ld %ree 'p #ash %or invest(ent in shortter( earning assets. Under the #'rrent loan ter(s+ #o(pensating balan#e re*'ire(ents &o'ld #onstrain "oy /orldJs a#tions+ be#a'se the #o(pany &o'ld not be able to red'#e its #ash a##o'nt belo& the pres#ribed (ini('(. "his is a point that #o'ld and sho'ld be negotiated &ith the ban8. )n todayJs ban8ing #li(ate+ the ban8 &o'ld probably rela, this #onstraint.
A variable #ash balan#e d'ring the (onth &o'ld appear to be a &ise poli#y. On pea8 o't%lo& days+ s'#h as >'st be%ore paydays+ interest pay(ent dates+ and ta, dates+ #ash #o'ld be trans%erred %ro( an interestbearing a##o'nt into the #o(panyJs #he#8ing a##o'nt to (eet daily #ash needs. Alternatively+ the #o(pany #o'ld ta8e do&n (ore o% its #redit line on days &hen it &as &riting lots o% #he#8s ;or e,pe#ting #he#8s to #lear=. A#t'ally+ the #o(pany probably o'ght to see >'st ho& #lose to $ero it #o'ld 8eep its #ash balan#e+ and then have a line o% #redit &hi#h per(itted *'i#8 #ash in%'sions as needed. till+ the (a,i('( line o% #redit ('st be %ore#asted.
4. "he only re#eipts sho&n in "oy /orldLs #ash b'dget are #olle#tions. /hat are so(e other types o% in%lo&s that (ight o##'rI Also+ the b'dget ignored short ter( interest e,penses and in#o(e. )% the #o(pany paid interest at a rate o% H per#ent ann'ally on the shortter( ban8 loan and re#eived < per#ent ann'al interest on s'rpl's #ash+ ho& #o'ld these ite(s be in#orporated into the #ash b'dgetI
Ans0er&
)n (ost %ir(s+ the (a>ority o% the #ash in%lo&s are #olle#tions on sales. 5o&ever+ other in%lo&s do o##'r. )n "oy /orldJs #ase+ in those (onths &here the #ash balan#e is greater than E<0+000+ s'rpl's #ash sho'ld be invested+ and interest in#o(e th's be earned. Other #ash in%lo&s #o'ld arise %ro( the sale o% sto#8s and bonds+ the sale o% %i,ed assets+ the e,er#ising o% &arrants+ the settle(ent o%
la&s'its+ and so on. All o% these ite(s+ as &ell as any e,penses that &ere overloo8ed earlier+ #an be easily in#orporated into the b'dget. )% yo' 8no& the
Toy World –Page 23
ti(ing and a(o'nt o% the #ash %lo&s+ then e,tra lines #an be inserted into the already #onstr'#ted b'dget to ta8e the( into a##o'nt. 7or e,a(ple+ interest
re#eived on shortter( invest(ents in any (onth &o'ld be the (onthly interest rate ti(es the average s'rpl's #ash d'ring the (onth+ and interest paid on short ter( borro&ing #o'ld be %ig'red si(ilarly. /ith the spreadsheet (odel+ &e #o'ld add a label hortter( interest paid or re#eived in Cell A9. /e #o'ld then 'se )7 state(ents to enter val'es on that line depending on &hether the #o(pany sho&s a #ash de%i#it or s'rpl's d'ring the period. "hese are the re*'ired state(ents
Cell !nter
A9 hortter( interest paid or re#eived
!9 )7;!10H0+0.0H:12Q!10H+0.0<:12Q!10H=
!9 :C S79.B9 S
5ere+ !10H #ontains the s'rpl's #ash or loans o'tstandingK 0.0H M HG is the ass'(ed ann'al rate paid on o'tstanding loansK 0.0< M <G is the ass'(ed ann'al rate earned on s'rpl's #ash. O% #o'rse+ the interest earned or paid is only an appro,i(ation+ be#a'se this approa#h ass'(es that the endo%(onth e,#ess or borro&ing &as o'tstanding d'ring the entire (onth. "he addition o% the short ter( interest ter( a%%e#ts the periodJs s'rpl's or de%i#it+ so CIRC &ill appear on the s#reen+ indi#ating the %eedba#8 e%%e#ts. ?y pressing the 79 ;re#al#'lation= 8ey a %e& ti(es+ the (odel &ill #o(plete eno'gh iterations to prod'#e the #orre#t %ig'res %or loans o'tstanding and s'rpl's #ash ;see "able 3=.
5. ?e#a'se #ash is a nonearning asset+ "oy /orldLs #ash (anage(ent poli#y is to invest any s'rpl's %'nds in (ar8etable se#'rities. Can yo' s'ggest an invest(ent poli#y that &o'ld provide li*'idity and sa%ety+ yet o%%er the %ir( a reasonable ret'rn on its (ar8etable se#'rities invest(entI pe#i%i#ally+ des#ribe the types o% se#'rities+ the desired (at'rities+ the e,pe#ted ret'rns+ and the ris8s that &o'ld be involved. /o'ld yo'r s'ggestions be the sa(e %or a #o(pany &hose #ash balan#es &ere pro>e#ted to be in the (illions o% dollars as opposed to "oy /orldLs tho'sandsI /o'ld it (atter i% the %ore#asts sho&ed #ash s'rpl'ses %or all %'t're (onths+ going o't inde%initely+ vers's a sit'ation in &hi#h s'rpl'ses and de%i#its alternated %ro( (onth to (onth d'e to seasonal %a#torsI
Ans0er&
"oy /orld sho'ld invest in shortter(+ lo&ris8+ highly li*'id instr'(ents s'#h as U.. "reas'ry bills and ban8 #erti%i#ates o% deposit ;CDs=. PT+ Orange Co'nty+ and so(e other organi$ations have invested in derivatives+ see8ing a so(e&hat higher yield than traditional se#'rities earned. "his proved to be disastro's+ and a%ter those e,perien#es+ (ost #orporations and govern(ent 'nits have banned the 'se o% derivatives %or invest(ent ;as opposed to hedging= p'rposes.
?e#a'se the a(o'nt o% %'nds involved here is not large in relative ter(s+ a (oney (ar8et ('t'al %'nd (ight be the best #hoi#e. Other&ise+ shortter( se#'rities
Toy World –Page 2
#o'ld be p'r#hased &ith (at'rities that (at#h anti#ipated #ash needs. arger %ir(s that #an e#ono(i#ally >'sti%y their o&n #ash (anage(ent personnel typi#ally 'se the sa(e sele#tion #riteria ;li*'idity and sa%ety+ and the highest ret'rn that is #onsistent &ith those #riteria=+ and they invest in the sa(e types o% se#'rities+ b't dire#tly rather than thro'gh a ('t'al %'nd inter(ediary.
Another se#'rity that has be#o(e pop'lar in re#ent years is %loating rate pre%erred sto#8+ &hi#h #an be p'r#hased individ'ally or thro'gh ('t'al %'nds established %or this p'rpose. ?e#a'se the sto#8 o%%ers a %loating dividend rate+ its pri#e re(ains at or near par+ so there is little interest rate ris8. 7'rther+ sin#e only a %ra#tion o% the dividends are ta,able to #orporate investors+ the a%terta, yield on s'#h sto#8s is generally higher than on the traditional (oney (ar8et instr'(ents. )% a %ir(Js #ash %lo&s are in the tho'sands rather than in the (illions+ the invest(ent o% e,#ess #ash &o'ld still be bene%i#ial+ b't not as #riti#al. )ndeed+ %or very s(all %ir(s it is even possible that the ret'rns &o'ld be ins'%%i#ient to re#over the #osts o% transa#tions. 5ere a (oney (ar8et a##o'nt &o'ld be the pre%erred alternative.
)% the s'rpl'ses are %ore#asted to #ontin'e inde%initely+ li*'idity be#o(es less o% an iss'e+ and the %ir( sho'ld #onsider per(anent 'ses o% the #ash %lo&s+ in#l'ding share rep'r#hases+ higher dividends+ repay(ent o% longter( debt+ (erger a#tivity+ and the li8e. onger ter( invest(ents typi#ally yield (ore than shorter ter( invest(ents+ and this %a#t sho'ld be #onsidered.
6. "he #ash b'dget is a %ore#ast+ hen#e (any o% the #ash %lo&s sho&n are e,pe#ted val'es rather than a(o'nts 8no&n &ith #ertainty. )% a#t'al sales+ hen#e #olle#tions+ are di%%erent %ro( the %ore#asted levels+ then the %ore#asted s'rpl'ses and de%i#its &ill be in#orre#t. 4o' 8no& that Dan and ra#e &ill be interested in 8no&ing ho& vario's #hanges in the 8ey ass'(ptions &o'ld a%%e#t the %'nds s'rpl's or de%i#it. 7or e,a(ple+ i% sales %ell belo& the %ore#asted level+ &hat e%%e#t &o'ld that haveI )t &o'ld be parti#'larly bad to have a E<00+000 line o% #redit and then %ind that d'e to in#orre#t ass'(ptions the a#t'al #ash re*'ire(ent &as EH00+000 /ith this in (ind+ ans&er the %ollo&ing *'estions. )% yo' are 'sing the spreadsheet (odel+ *'anti%y yo'r ans&ers. Other&ise+ >'st dis#'ss the li8ely e%%e#ts o% the indi#ated #hanges. )n either sit'ation+ indi#ate &hat sort o% #ontingen#y plans the #o(pany sho'ld (a8e to prepare %or the types o% event'alities noted. )n this dis#'ssion+ re#ogni$e that getting a line o% #redit is not &itho't #ost.
a.) /hat &o'ld be the i(pa#t on the (onthly net #ash %lo&s %ro( an'ary to 'ne 1996 i% a#t'al sales &ere 20 per#ent belo& the %ore#asted a(o'ntsI ;)n yo'r ans&er+ ass'(e that a#t'al sales %or @ove(ber and De#e(ber 199< are 20 per#ent belo& the %ore#asted level. Also+ ass'(e that p'r#hases and labor+ as &ell as all other e,penses+ are set by #ontra#t at the start o% the 6(onth %ore#ast period on the basis o% the original e,pe#ted sales+ so the o't%lo&s #annot be ad>'sted
Toy World –Page 2<
do&n&ard d'ring the planning period even tho'gh sales de#line belo& the %ore#asted levels.=
$.) /hat i% a#t'al sales &ere only <0 per#ent o% the %ore#asted levelI "o ans&er this *'estion+ again ass'(e that all e,penses are based on the e,pe#ted level o% sales+ not the reali$ed level.
c.) 'ppose #'sto(ers #hanged their pay(ent patterns and began paying as %ollo&s 2< per#ent in the (onth o% sale+ << per#ent in the %ollo&ing (onth+ and 20 per#ent in the se#ond (onth vers's the old 3<60< pattern. @o& ho& large a
#redit line &o'ld the #o(pany re*'ireI Ans0er&
ensitivity analysis is e,tre(ely i(portant &hen 'sing a #ash b'dget %or planning p'rposes. 7'rther+ s'#h analysis is terribly di%%i#'lt i% done by hand+ yet very easy
i% a spreadsheet (odel is e(ployed.
a.) "he %ollo&ing pro>e#tions indi#ate that i% the sales %ore#asts t'rn o't to be overly opti(isti#+ additional %inan#ing &ill be re*'ired. "his res'lt o##'rs be#a'se &e ass'(ed that prod'#tion and overhead #osts are %i,edthey &ere set on the basis o% e,pe#ted sales rather than on the basis o% reali$ed sales. )% the #o(pany &ere able to ad>'st its prod'#tion s#hed'les to instantly re%le#t belo& %ore#ast sales levels+ the %'nd re*'ire(ents &o'ld be lo&er. )ndeed+ i% the %ir( %ore#asted a de#lining level o% sales+ then it #o'ld probably dra& do&n inventories and th's generate #ash in e,#ess o% the originally %ore#asted level. "he (ain p'rpose o% this *'estion is to sho& the i(portan#e o% the sales %ore#ast+ and also
the i(portan#e o% ad>'sting prod'#tion to a#t'al sales. /e obtained the %ollo&ing res'lts 'sing the spreadsheet (odel.
ales de#rease 20G Original ales
@et Cash 7lo& @et Cash 7lo&
an'ary E13<+F00 E2F9+100
7ebr'ary ;10+HF0= H9+0<0
-ar#h ;192+16F= ;131+960=
April ;1<+F60= ;93+F2<=
-ay ;233+920= ;190+00=
'ne ;H<+00= ;32+000=
C'('lative ;oan= C'('lative ;oan=
or 'rpl's or 'rpl's
an'ary E13<+F00 E2F9+100
7ebr'ary 12<+020 36F+1<0
-ar#h ;6H+1F= 236+190
April ;213+00F= 12+36<
-ay ;6+92F= ;F+03<=
Toy World –Page 26
As sho&n above+ i% sales are 20 per#ent belo& the original %ore#ast+ the #'('lative loan re*'ire(ents in the (onth o% 'ne is &ell above the E<00+000 line o% #redit available to "oy /orld. @ote also that the #ash b'dget represents a %ore#ast+ so all the val'es in the b'dget are e,pe#ted val'es. )% the 'nderlying probability distrib'tion &as available+ then a -onte Carlo si('lation #o'ld be 'sed to set the target #ash balan#e %or ea#h (onth %ro( an'ary to 'ne. /e #o'ld then ens're+ &ithin so(e stated #on%iden#e level+ that the #ash holdings &o'ld be s'%%i#ient.
$.) "he %ollo&ing table sho&s the sit'ation i% a#t'al sales are <0 per#ent belo& the %ore#asted level
@et Cash C'('lative
7lo& 'rpl's ;oan=
an'ary ;E9+1<0= ;E9+1<0=
7ebr'ary ;1<+<2<= ;239+6H<=
-ar#h ;2F2+F0= ;<22+1<<=
April ;223+913= ;H6+06F=
-ay ;299+200= ;1+0<+26F=
'ne ;<0+<00= ;1+<F<+H6F=
)n this #ase+ the E<00+000 line o% #redit &o'ld not be s'%%i#ient in the (onths o% -ar#h+ April+ -ay+ and 'ne. )n %a#t+ %ro( April to 'ne+ the de%i#it &o'ld %ar e,#eed the line o% #redit.
c.) "he %ollo&ing tab'lation sho&s ho& the #hange in the pay(ent pattern &o'ld a%%e#t the re*'ired loan
@et Cash C'('lative
7lo& 'rpl's ;oan=
an'ary E313+F<0 E313+F<0
7ebr'ary 163+00 HH+2<0
-ar#h ;99+00= 3HH+F<0
April ;F+FH<= 292+9H<
-ay ;1H9+2<0= 113+H2<
'ne ;32+H<0= ;319+02<=
in#e "oy /orldJs sales are seasonal+ &ith high sales in the early and later (onths o% the si,(onth b'dgeting hori$on+ the slo&er #ash #olle#tion pattern has the e%%e#t o% evening o't the #ash s'rpl's:de%i#it. "he ;delayed= #ash re#eipts %ro( the high sales (onths o##'r in (onths &ith lo&er sales.
%7. ?ased on all o% yo'r analysis+ ho& large a #redit line &o'ld yo' re#o((end that Dan see8 %ro( the ban8I
Ans0er&
"he ans&er here depends on (anage(entJs toleran#e %or ris8 and its vie& o% the a##'ra#y o% its %ore#asts. Clearly+ a line o% at least E<00+000 is re*'ired+ and
Toy World –Page 2H
pr'den#e &o'ld s'ggest (ore. "he 1.< per#ent #o((it(ent %ee &o'ld (ean a #ost o% E1+<00 per year per E100+000 o% 'n'sed line. "his E1+<00 #an be tho'ght o% as an ins'ran#e pre(i'( against the #han#e that the %ore#ast &ill not be reali$ed. )% the %ore#ast is tho'ght to be *'ite a##'rate+ then it &o'ld probably not be &orth it to get a line over abo't E600+000. 5o&ever+ the toy b'siness is 'npredi#table+ hen#e a sa%ety (argin &o'ld probably be a good idea. "hat &o'ld s'ggest a larger line+ say EH<0+000.
O% #o'rse+ i% the #o(pany #an negotiate and get the E<0+000 #o(pensating balan#e red'#ed+ this &o'ld red'#e the #ash re*'ired and th's the #redit line re*'ire(ents. Also+ i% the #o((it(ent %ee &ere raised or lo&ered+ that too &o'ld a%%e#t the de#ision.
)n s'((ary+ based on the in%or(ation at hand+ &e &o'ld re#o((end that the #o(pany see8 a #redit line in the range o% E600+000 to EF00+000+ and also that it see8 (ore %le,ibility in its #o(pensating balan#e re*'ire(ent.
%%. Dan C'lbreth has been thin8ing abo't possibly #hanging prod'#tion pro#ed'res so as to level o't prod'#tion d'ring the year. "his &o'ld stabili$e the labor %or#e and probably lo&er per 'nit #osts. Can yo' thin8 o% any possible negative e%%e#ts o% s'#h a #hange+ and &o'ld a prod'#tion pro#ess #hange a%%e#t #ash re*'ire(entsI
Ans0er&
"he #o(pany &o'ld have to start prod'#tion early in the year to b'ild 'p prod'#t %or the pea8 sales. "his early prod'#tion &o'ld have to be %inan#ed+ #osts &o'ld be in#'rred early+ sales and #olle#tions &o'ld %ollo& ('#h later. )% the %'nds &ere to be borro&ed+ the #redit line &o'ld be ('#h larger than &hat &e have dis#'ssed th's %ar. Another dra&ba#8 to leveling o't prod'#tion is that toy sales are so(e&hat 'npredi#table+ so it is better to &ait %or orders be%ore prod'#ing. )t &o'ld be a big (ista8e to prod'#e a lot o% a parti#'lar type o% toy ba#8 in the spring and then have 8ids t'rn a&ay %ro( that toy &ith yo'r &areho'se %'ll o% the(. Cole#o &ent ban8r'pt be#a'se it prod'#ed too (any Cabbage Pat#h dolls >'st as they &ere going o't o% %ashion.
