BIGLOW TOY COMPANY
In late August 1997, Jean Biglow, treasurer of Biglow Toy Company, was concerned with financing its sales operations during the upcoming Christmas selling season. To cope with the Christmas sales peak, Jean planned to build up Biglow’s toy inventory throughout the fall. This would generate substantial cash deficits in October, November, and December. Some means of short-term financing had to be found to cover these deficits. On the other hand, Jean anticipated a cash surplus in January and February, when Biglow’s retailers paid their Christmas invoices. A small cash surplus was also anticipated in September as a result of over-the-summer toy purchases.
Jean tried to maintain a minimum balance in Biglow’s cash account throughout the year. This was to protect against errors in estimating both the size and timing of future cash flows. The planned minimum balance was normally set as a fixed percentage of each month’s anticipated dollar sales volume. This procedure had proven adequate in the past against virtually all contingencies.
Except for deciding how to finance the fall buildup in inventory, Jean had already completed a six-month financial plan. This covered the period September 1997 through February 1998. Selected portions of the plan are shown in the table below. SIX-MONTH FINANCIAL PLAN
(ALL FIGURES IN THOUSANDS OF DOLLARS)
SEP OCT NOV
Accounts Receivable Balance
$700 $500 $700 $1200
Planned Payments for Purchases
$800 $900 $1000 $600
Cash Surplus From Operations
$200 ------Cash Deficit From Operations
--- $300 $600
The accounts receivable balances shown in the table refer to the beginning of each month. Thus, Jean anticipates $700,000 in accounts receivable at the beginning of September, $500,000 at the beginning of October, and so forth.
On the average, Biglow receives a 3% discount from its toy suppliers for prompt payment of purchases. Jean normally...
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