CAPE CHEMICAL: CASH MANAGEMENT

Complete “The Tasks” 1, 2, 4, 6, 7, and 8 found on pp. 85 – 86.

refer attachment

CAPE CHEMICAL: CASH MANAGEMENT

David Kunz, Southeast Missouri State University

Benjamin L. Dow III, Southeast Missouri State University

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 also allows an examination of the

difference between accounting profit (based on accrual accounting) versus cash flow. 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 3-4 hours of

preparation time from the students.

CASE SYNOPSIS

Cape Chemical is a regional distributor of liquid and dry chemicals. Growth has been steady

since its beginning, but cash to pay employees and vendors in a timely manner has frequently been

a problem. While the company ended its last year with a healthy cash balance, there were many

occasions during the year that it was necessary to delay vendor payments or obtain short-term bank

loans in order to keep the company operating. On one occasion when a major vendor threatened

to stop shipments until all outstanding balances were current and the bank credit was fully used,

company credit cards were used to obtain $20,000 to pay (satisfy) the vendor. In an effort to resolve

the cash problems, the company has developed a projected income statement, balance sheet and

cash flow statement for the next year of operation. Cape Chemical’s bank officer suggested the

company prepare a monthly cash budget as another cash management tool and as an additional test

of the adequacy of the current $200,000 line of credit.

CAPE CHEMICAL BACKGROUND

Cape Chemical is a relatively new, regional distributor of liquid and dry chemicals,

headquartered in Cape Girardeau, Missouri. The company, founded by Ann Stewart, has been

serving southeast Missouri, southern Illinois, northeast Arkansas, western Kentucky and northwest

Tennessee for three years and has developed a reputation as a reliable supplier of industrial

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Journal of the International Academy for Case Studies, Volume 14, Number 7, 2008

chemicals. Stewart’s previous business experience provided her with a solid understanding of the

chemical industry and the distribution process. As a general manager for a chemical manufacturer

Stewart had Profit & Loss (P&L) responsibility, but until beginning Cape Chemical she had limited

exposure to company accounting and finance decisions.

To improve management of the accounting and finance area, Stewart hired Kathy Ford, an

accountant who had worked with the accounting firm that conducted Cape’s first audit. Ford was

hired near end of the second year of operation.

CHEMICAL DISTRIBUTION

A chemical distributor is a wholesaler. Operations may vary but a typical distributor

purchases chemicals in large quantities (bulk - rail or truckloads) from a number of manufacturers.

Bulk chemicals are stored in "tank farms", a number of tanks located in an area surrounded by dikes.

Tanks can receive and ship materials from all modes of transportation. Packaged chemicals are

stored in a warehouse. Other distributor activities include blending, repackaging, and shipping in

smaller quantities (less than truckload, tote tanks, 55-gallon drums, and other smaller package sizes)

to meet the needs of a variety of industrial users. In addition to the tank farm and warehouse, a

distributor needs access to specialized delivery equipment (specialized truck transports, and tank rail

cars) to meet the handling requirements of different chemicals. A distributor adds value by

supplying its customers with the chemicals they need, in the quantities they desire, when they need

them. This requires maintaining a sizable inventory and operating efficiently. Distributors usually

operate on very small profit margins.

THE SITUATION

While the company ended its last year with a healthy cash balance, there were many

occasions during the year that it was necessary to delay vendor payments or obtain short-term bank

loans in order to keep the company operating. On one occasion when a major vendor threatened

to stop shipments until all outstanding balances where current and the bank credit was fully used,

Ann Stewart used her company credit cards to obtain $20,000 to pay (satisfy) the vendor.

During the first three years of operations, the company operated with a sales forecast and a

few operating budgets but a complete set of pro forma statements were not prepared. In an effort to

resolve the cash problems, Stewart, with the help of Ford, developed a projected income statement,

balance sheet and cash flow statement for the next year of operation (tables one, two and three).

Ford thought the statements indicated the company’s cash problems were solved. “Look

Ann, if our forecasts are correct, and our forecast should be accurate, since our assumptions were