Cumulative surplus (deficit)


-$ 60

-$ 5


We will assume that Fun Toys starts the year with a $20 cash balance. Furthermore, Fun Toys maintains a $10 minimum cash balance to guard against unforeseen contingencies and forecasting errors. So, the company starts the first quarter with $20 in cash. This amount rises by $40 during the quarter, and the ending balance is $60. Of this, $10 is reserved as a minimum, so we subtract it out and find that the first quarter surplus is $60 - 10 = $50.

Fun Toys starts the second quarter with $60 in cash (the ending balance from the previous quarter). There is a net cash inflow of -$110, so the ending balance is $60 - 110 = -$50. We need another $10 as a buffer, so the total deficit is -$60. These calculations and those for the last two quarters are summarized in Table 19.6.

At the beginning of the second quarter, Fun Toys has a cash shortfall of $60. This occurs because of the seasonal pattern of sales (higher towards the end of the second quarter), the delay in collections, and the planned capital expenditure.

The cash situation at Fun Toys is projected to improve to a $5 deficit in the third quarter, but, by year's end, Fun Toys still has a $20 deficit. Without some sort of financing, this deficit will carry over into the next year. We explore this subject in the next section.

For now, we can make the following general comments on Fun Toys's cash needs:

1. Fun Toys's large outflow in the second quarter is not necessarily a sign of trouble. It results from delayed collections on sales and a planned capital expenditure (presumably a worthwhile one).

2. The figures in our example are based on a forecast. Sales could be much worse (or better) than the forecasted figures.

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