Discussion: Budgeting Challenges

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Economics

Description

First, read Chapter 6 and Case 3: Miller Building Supplies in your textbook, and then watch the brief video Working Capital Video Definition.


You are the CFO of Miller Building Supplies. Using the financial exhibits at the end of the case study to determine the working capital required and actual level for each quarter of the year for the firm, address the following in your initial post:

  • What challenges does Miller Building Supplies face in establishing a monthly cash budget?
  • What would a cash budget provide Miller Building Supplies, if completed successfully?
  • What are some working capital options that might improve the firm’s cash position and profit?
  • How might the company’s accounts receivable choices impact the company?

Please answer the every questions as the list and the words should be within 3-4 pages in APA style.

Do not answer the questions in the file and just answer the questions in this description board.

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ANNE ARUNDEL COUNTY IS LOCATED south of Baltimore, MD, and is the home of Annapolis, MD, the location of the U.S. Naval Academy. Annapolis and the surrounding area has become a popular recreational and retirement community due to its access to the Chesapeake Bay, historic areas, and decent medical care. Furthermore, a major airport (BWI Thurgood Marshall Airport) is less than one hour away, and Washington, DC, is approximately the same distance. The potential growth of the county has attracted numerous businesses, with more expected to follow. The economy is diverse. Roughly 75 percent of employment is in service, education, and government; retail; financial; and the hospitality industry. Many Maryland state offices are in the area of Annapolis, and the county has such institutions of higher learning as St. John’s College and Anne Arundel Community College, in addition to the Naval Academy. JOSEPH MILLER STARTS MBS Joseph Miller founded his building supply company after returning from the Korean War. He saw the migration of economic activity in the county from agri- culture to a diversified mix of businesses, and located Miller Building Supplies (MBS) in the town of Glen Burnie in 1953. His choice of Glen Burnie was motivated by access to the major highways in that part of the state and the recent opening of the Chesapeake Bay Bridge to access the Eastern Shore of Maryland. The firm began as a wholesale distributor of various building supplies like paint, lumber, flooring, drywall, fencing, and cleaning supplies. As Miller developed his customer base, he came to realize that construction companies needed a full range of electrical, plumbing, and heating/air conditioning supplies and equipment in addition to basic building materials. MBS has been run by Joseph Miller’s children and now his grandchildren. As of 2010, Joseph III is the president, although he has been considering retiring. Joseph III’s cousins are the chief financial officer (CFO), the marketing vice president, and the chief purchasing officer. The family has been quite successful in managing the business, and MBS is continuously profitable despite the fact that sales are sensitive to the economy of Anne Arundel County, of southern Maryland, and the Eastern Shore counties. VARIATIONS IN WORKING CAPITAL REQUIREMENTS The company’s sales are seasonal, and during the colder months building activities slows down. If the winter is mild, some building projects continue, but large new projects are not usually started until the spring. The low point of the year is January, and from that time on, sales build. MBS has a small year‐round labor force and employs seasonal workers during peak business periods. Management is quite aware of the seasonal variation in the working capital position of the company. Historically, MBS has maintained large cash positions, and when receivables and inventory have increased, it has primarily financed them by drawing down cash. However, the company is taking a critical look at this strategy. The CFO realizes that further expansion of MBS may be difficult using internally generated funds. The cash philosophy may be unnecessarily tying up capital, and it may be appropriate to use short‐term financing for seasonal working capital needs. The president thinks that the CFO’s suggestion is worth pursuing, particularly as it would free up long‐term capital for expansion. The marketing vice president is not convinced and thinks that the company’s financing methods continue to be appropriate. In addition, he is opposed to additional interest expense and having to deal with a bank. His cousin, the sales manager, is not opposed to using debt to finance working capital and argues that receivables and inventory should be supported with short‐term debt. A BANKER’S ASSISTANCE The Bank of Maryland (the “Bank”) has dealt with MBS for four decades. The company has never established much of a relationship with the Bank except for an occasional term loan, depository and disbursement services, and a few other services. As noted, long‐term capital has generally been internally generated. The Bank has tried to develop a stronger relationship as it considers MBS to be a stable, well‐run company. When Sara Williams, the Bank’s calling officer for MBS, received a phone call from Joseph Miller III, she was more than willing to meet him. The CFO asked for help in analyzing MBS’s working capital needs to do the following: ◾ Estimate MBS’s working capital needs. ◾ Determine if the Bank is willing to extend MBS a line of credit sufficient to finance the company’s working capital. QUESTIONS 1. Using the data in Exhibit C3.1, estimate the amount of working capital that is required during each quarter of the year. Does MBS have excess working capital during these periods? If so, what do you suggest? 2. Aretherespecificworkingcapitalmanagementsuggestionsthatyoucan make to the company? 3.If a line of credit is requested from the Bank, should it be offered?At what interest rate? Specify terms that the Bank can reasonably require. You should refer to Exhibits C3.2 through C3.4 in your analysis. 4. Wouldamonthlycashbudgetimproveforecastingandsupportforaline of credit? If so, provide a cash budget (to the best of your ability based on the data in the case). Assume that the contractors who purchase from MBS pay when they are paid by their residential and commercial customers, which is one‐half in the second month and one‐half in the third month following sales. Assume also that MBS must pay one‐half of its payables in the month the expense is incurred, and one‐half in the following month.
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