BI GLOW TOY COMPANY

In late August 1997, J ean Biglow, treasurer of Biglow Toy Company, was concerned with
financing its sales operations during the upcoming Christmas selling season. To cope with the
Christmas sales peak, J ean planned to build up Biglows toy inventory throughout the fall. This
would generate substantial cash deficits in October, November, and December. Some means of
short-term financing had to be found to cover these deficits. On the other hand, J ean
anticipated a cash surplus in J anuary and February, when Biglows retailers paid their Christmas
invoices. A small cash surplus was also anticipated in September as a result of over-the-summer
toy purchases.
J ean tried to maintain a minimum balance in Biglows cash account throughout the year.
This was to protect against errors in estimating both the size and timing of future cash flows.
The planned minimum balance was normally set as a fixed percentage of each months
anticipated dollar sales volume. This procedure had proven adequate in the past against
virtually all contingencies.
Except for deciding how to finance the fall buildup in inventory, J ean had already
completed a six-month financial plan. This covered the period September 1997 through
February 1998. Selected portions of the plan are shown in the table below.

SIX-MONTH FINANCIAL PLAN
(ALL FIGURES IN THOUSANDS OF DOLLARS)
SEP OCT NOV DEC J AN FEB
Accounts Receivable Balance $700 $500 $700 $1200 $1000 $500
Planned Payments for Purchases $800 $900 $1000 $600 $400 $500
Cash Surplus From Operations $200 --- --- --- $300 $1500
Cash Deficit From Operations --- $300 $600 $900 --- ---

The accounts receivable balances shown in the table refer to the beginning of each
month. Thus, J ean anticipates $700,000 in accounts receivable at the beginning of September,
$500,000 at the beginning of October, and so forth.
On the average, Biglow receives a 3% discount from its toy suppliers for prompt
payment of purchases. J ean normally takes advantage of such discounts, whenever possible,
and so, the planned payments shown in the table assume prompt payment and realization of
the 3% average discount. If Biglows payments are delayed, the discount will be lost, and actual
payments will exceed planned payments, accordingly.
The cash surplus and deficit figures shown in the table are net of all other operations,
including anticipated sales receipts, planned payments for purchases, and all other planned
receipts and payments. These figures are also net of the standard provision for each months
minimum cash balance. Thus, J ean expects a surplus of $200,000 from operations during
September, a deficit of $300,000 from operations during October, and so forth. Each of the
surplus and deficit figures shown in the table represents the incremental (not cumulative)
surplus or deficit anticipated during that month.
As anticipated in Exhibit 1, J ean has three sources of short-term borrowing to meet
Biglows monthly cash needs. These are:
1_ Pledging accounts receivable balances, that is, factoring;
2_ Delaying payments of purchases; and
3_ Obtaining a six-month bank loan.
A local bank has agreed to loan Biglow funds at the beginning of any month against a
pledge of its accounts receivable balance. The maximum loan that Biglow can obtain from this
source is 75% of the accounts receivable balance outstanding at the beginning of that month.
Whatever is borrowed, if anything, must be returned to the bank at the beginning of the next
month, plus an interest payment of 1.5% of the amount actually borrowed.
Payments to suppliers for purchases may be delayed for a maximum of one month.
Thus, up to $1,000,000 in payments currently scheduled for November may be delayed until
December. Whatever portion, if any, of these planned payments is delayed would become
available to finance the anticipated deficit from operations during November. However, J eans
own policy strictly forbids delaying payments more than one month beyond the month when
they are supposed to be paid. Also, the average 3% discount is lost on all payments that are
actually delayed. For example, if J ean delays the planned payment of $1,000,000 for
November, then the payment in December for this delayed amount will be 1,000,000/.97 =
1,000,000 x 1.031 = $1,031,000 approximately.



The local bank is also willing to make a one-time loan to Biglow of any amount from a
minimum of $400,000 to a maximum of $1,000,000 for six months. If such a loan is taken, the
entire loan will be received by Biglow at the beginning of September and repaid at the end of
February. In addition, Biglow must pay the bank a 1% monthly interest charge at the end of
each month. Once taken, it is not possible to increase the loan nor to repay any portion of it
during the six-month period. The 1% mothly interest charge therefore applies to the entire
amount, if any, actually borrowed.
At the end of every month, J ean inspects the current balance in Biglows cash account.
Whatever excess funds remain over and above the minimum balance planned for the next
month are invested immediately in 30-day government securities. Securities are purchased at
the beginning of the next month and sold at the end of that month. Upon selling the securities,
Biglow receives one-half percent interest on the excess funds, if any, actually invested. No
excess funds are anticipated for month of August, but J ean plans to continue this investment
procedure between September and February.
The sources and uses of funds are diagrammed for the first two months in Exhibit 2 in
which AS is the amount borrowed by pledging Accounts Receivable in September, AO is the
amount borrowed pledging Accounts Receivables in October, PS is the amount made available
by postponing Payments in September, PO is the amount made available by postponing
Payments in October, and L is the amount of the (one-time) six month Loan in September, if
any.
J ean must decide how to cover the operating deficits indicated in Table 1 by utilizing
some combination of the three sources of short-term borrowing. J ean expects to maintain at
least the planned minimum balances in Biglows cash account at the end of each month as a
reserve for contingencies while minimizing the net dollar cost of whatever six-month financing
plan is adopted.


EXHI BI T 2
Sources and Uses of Founds for September and October