PALMERS CASE STUDY

Palmer's Case study



Palmer's Case Study

Part 1 - Sensitivity Analysis

After conducting sensitivity, analysis interest rate is the factor, which will affect Bill the most. When the interest changes the cost of borrowing increases, which results in increased expenses for the company.

Reduced Sale of New Contracts: The Sales are reduced and the profits have declined

Change in Prime Canadian Interest rate: By changing the interest rate and increasing it the interest costs have increased and the cash budgets declined.

Change in time to pay invoices: By increasing the time, the cash flows are majorly affected because the company is unable to satisfy its liquidity requirements.

Part 2-Advantages & Disadvantages of Cash Budgets

Cash budgets play an integral role in controlling the inflow and outflow of cash in the company. The indicators presented in the cash budget allow the management to make informed decisions regarding the financial position of the company. The difference between the inflows and outflows give indicators regarding the ability of the organization to liquidation position of the company. This enables the company to take a proactive approach to manage its regulatory cash requirements. Firms that consistently borrow from the banking sector can use cash budgets to make sure that they remain within safe boundaries of their cash coverage ratio (Brigham et al, 2010).

A cash budget helps in identifying the minimum cash that the company needs to have to meet its immediate and other short-term obligations. This eliminates the need to borrow cash with high interest rate in the future due to lack of planning. Moreover, firms to get a measure of the extent of credit sales use this information. If the company extends the borrowing period along, it usually results in boosting the sales. Hence, by using cash budgets the management can decide what credit lending policy to adopt in the current basis. Similarly, the analysis of the cash budget allows the management to use its cash resources in an optimal manner. By maintaining minimum working capital, while investing the resulting cash into profitable businesses and building inventories can help reduce operational and other risks of doing business in the future. The financial capacity of the company to meet the requirements of the future expansions can be forecasted by using cash budgets. Cash budgets provide a good cash management process, which provides information regarding the sources of cash inflows and outflows. Cash budgets can be misleading as cash inflows are never equivalent of the capacity of the company to generate profits. If the management wants to exaggerate the profitability of the company, they can create a large cash outflow before the end of a period. By delaying the payout of cash, the company can give misleading profitability signs even if it is experiencing a loss. In the same manner, if the company pays out early, it can give a sign that the company is facing exaggerated negative cash flows. Another disadvantage of cash budgets is the large reliance on ...