Academic journal article Journal of the International Academy for Case Studies

Stonebridge Country Club: Cash ... Is There enough?(Instructor's Note)

Academic journal article Journal of the International Academy for Case Studies

Stonebridge Country Club: Cash ... Is There enough?(Instructor's Note)

Article excerpt

CASE DESCRIPTION

The primary subject matter of this case concerns the development and use of a cash budget as a key component in a cash management system. The case requires students to have an introductory knowledge of accounting, finance and general business issues, thus the case has a difficulty level of three (junior level) or higher. The case is designed to be taught in one class session of approximately 1.25 hours and is expected to require 4-6 hours of preparation time from the students.

CASE SYNOPSIS

Paul Sparks, a successful pharmacist and avid golfer, recently sold his family drug store and is negotiating with Golf Corp LLC to purchase Stonebridge Country Club. Stonebridge Country Club is a private golf course that Sparks has been a member of for the last 20 years. Sparks and Golf Corp LLC have tentatively agreed on a purchase price providing Sparks can arrange financing. Sparks has developed projected income statements, balance sheets and cash flow statements for the first four years of operation for his new company and approached a local commercial bank for a working capital loan and equipment financing. The bank expressed an interest in making the loans but requested Sparks include a cash budget for the first year of operation.

INSTRUCTORS' NOTES

Case Overview

Sparks and Golf Corp LLC have tentatively agreed on a purchase price providing Sparks can arrange financing. During the negotiation process with Golf Corp LLC, Sparks was assisted by Rick Scott, an associate with Williams Inc, headquartered in Little Rock, Arkansas. Williams Inc. is one of the largest investment banking firms off of Wall Street and has a long historical record of assisting firms arrange financing for new ventures.

Sparks, with the help of Scott, developed projected income statements, balance sheets and cash flow statements for the first four years of operation for his new company and approached a local commercial bank for a revolving credit agreement of $200,000 and property and equipment interest loan mortgage loan of $1,700,000 (no principal payment is required until maturity). Sparks would invest $700,000 as equity. The projected income statement, balance sheet and cash flow statement for the first year of operation are provided. The bank has expressed an interest in providing the credit but asked Sparks to prepare a cash budget for the first year of operation to ensure the requested financing is adequate. Sparks was unsure how to begin and requested Scott's assistance. Scott stated that similar to preparing forecasted financial statements, they needed to prepare a list of operating assumptions.

DISCUSSION QUESTIONS

1. Construct a monthly cash budget for Stonebridge for the period January through December 2005. Assume that all cash flows occur on the 15th of each month. Is the requested $200,000 revolving credit agreement sufficient to meet the needs of Stonebridge during the year? Explain your answer.

The complete cash budget is provided in Table One. A summary of the budget is as follows: (based on 100 new members)

The cash budget indicates that Stonebridge will exceed the $200,000 revolving credit agreement during the months of April (borrowing required $208,955) through September (borrowing required $209,006). Based on the assumptions used to prepare the cash budget, the requested $200,000 revolving credit agreement will not be sufficient to meet the needs of Stonebridge.

The cash budget confirms the bank's concern regarding the cash requirements for year one of operation.

Note: Students answers may vary by a few dollars due to spreadsheet rounding.

2. The cash budget contains both cash inflow and cash outflows. Which do you feel are likely to be the most accurate? Explain your answer.

Cash outflows result from expenditures (capital investments, course maintenance, marketing expenses, general and administrative expenses and interest expense) controlled by Stonebridge thus are likely to have a higher degree of accuracy (both the amount and timing of the outflow) than the inflows. …

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