Hal Carrier, of Bulltuff Stock Trailers, Inc., has asked you for help. In the last four months, he has had several checks written to suppliers that were refused by his bank because of nonsufficient funds. Now his main sup-plier, Alcoa Aluminum Supply Co., has cut off credit. “
We’re sorry, Hal,” Alcoa’s credit officer said, “but we simply cannot keep accepting your checks. Every time one bounces, it costs us at least $100 combined in processing fees and our internal accounting. You simply will have to pay cash or bring a cashier’s check for future purchases.”
Hal simply cannot understand why his checks keep bouncing. “We’ve plenty of sales,” he said, “and our customers pay pretty much as agreed. Right now, I have only one customer who is as much as 60 days past due. My accountant, Brill Yant, assures me that our cash balance never goes negative. So why are my checks bouncing?”
To try to understand Hal’s problem and to advise him how to correct it, you have collected the following information about Hal’s business:
1. Cash sales are 10 percent of total sales.
2. Credit card sales are 10 percent of total sales and are collected the week following the sale. The credit card provider deducts 2.5 percent of the gross amount of each credit card sale. (For example, on a $100 sale, $ 2.50 is deducted.)
3. Sales on account are 80 percent of all sales. All credit sales are to dealers. Terms for dealers are “30- 30- 30,” that is, three equal payments made in each of the three months following the sale. Payments are considered late if they’re not received by the tenth of the month in which they are due.
4. Direct materials, primarily aluminum, are 60 percent of the cost of building a trailer. Before credit was cut off, Bulltuff paid 30 percent on delivery and the remainder in 30 days. Now it must pay cash on delivery.
5. Total cost of direct labor is 15 percent of the cost of building a trailer. Workers are paid each Friday for work performed the previous week. Withholding and employment taxes are paid each Friday, also.
6. Variable costs combined (e. g., materials and labor) are 50 percent of gross sales. Fixed costs are not allocated to the cost of trailers but are expensed evenly across the year.
7. All other costs combined are treated as fixed costs, and total $ 1 million per year.
8. Bulltuff leases its building and equipment and has no depreciation.
9. Sales for the year were originally projected to be $ 2,450,000. However, given the current growth in sales, Hal now estimates that sales will be $ 5,000,000.
10. Sales for the first four months of the year have been: January $ 208,000, February 261,000, March 293,000, April 328,000

1. What is causing Hal’s cash flow problems?
2. Develop a plan to address the problems.

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Answer 1:
One of the most important strategies to be used by organizations to maintain short-term liquidity is working capital management and minimizing the length of the working capital cycle. In this case, the timings of the cash flows are not matching with each other due to which there are shortages of cash. As an example, all the expenses are paid upfront that implies that the cash outflows occur at the same instant. On the other hand, receipts from sales are received in a staggered manner with only 10% being received on the spot while as much as 30% are received...
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