1. Prepare a cash budget for the period February through August. See Exhibit C1.

1 for
necessary data.

2. Is there any advantage to extending the forecast through September, October, and
November? Explain.

Answer:

Yes, there is an advantage of extending the forecast through these months. As mentioned
in the case, July through November is the busiest month of the hotel. Dinner Bell hotel is
experiencing uncertainty of relying to its operation. I believed that by extending its
forecast through months July to November, they could be able to discern clearly of how
much cash may be generated or may deficit. The case also distinguished that months
November to April run cash deficits most. Another reason is that the company has slow
marketing team to decide for analysis so it makes sense that the forcast should be made to
have a greater chance of achieving their goals.

3. Let’s assume the hotel’s cash flow would not be sufficient to cover any shortfall
occurring during the cash budget period. What proportion of payables must be
deferred to get the resort through this period?

Answer:

Deferring payments from suppliers can be the firm’s best option. By deferring payments
to their vendors and supplier, they could be able to extend their payments while waiting
for cash to come in. Extending trade credit arrangements are essential because these loans
are short term and interest-free financing. Sarah distinguished in the case that they are a
good customer. For me, this is an essential idea because they are an existing customer so
their vendors would surely extend a realistic amount of trade credit for them.

4. Sarah, in essence, may be asking the firm’s vendors for a loan if she request a
deferral on payables. From the hotel’s point of view, the size of the loan is your
answer to question 3. From the supplier’s point of view. However, the size of their
investment in the loan is actually less than that amount. Explain why.

Answer:

Suppliers are eager to maintain a good relationship to their customers but they hold higher
risk than them. Suppliers sometimes are afraid to lose their customers the reason they
allow them to pay for delay when necessary. Whenever suppliers approved for deferrals,
it is another account receivable to them. It is another serious cash flow problem to
suppliers especially when customers ask for unfavorable terms. Suppliers also pay
different protective mechanisms like cost to bad debt recovery in case of facing with
intrasigent customers. Firms whose payments are extended may be able to manage their
 cash flow but suppliers will be forced to postpone some of its operation because of the
longer wait for the payment. That is why it is considered that the suppliers investment is
seen to be actually less than the loan of the hotel. Sarah on the other hand, said in their
monthly meeting that they will pay COD when business picks up.

5. Do the suppliers have an incentive to cooperate? Explain.

Answer:

The suppliers do not have an extra incentive for this trransaction because there is no
interest rate from this transaction.

6. The suppliers may be unable to cooperate. Why.

Answer:

They have been a good partner ever since so I think they are willing enough to do this for the
hotel. However, the only possibility that suppliers would decline to cooperate would be about
how long they would wait for the payment.

7. As follow up to question 6, if the suppliers are unable (or unwilling) to cooperate,

how do you think Sarah should proceed?

Answer:

Sarah should proceed should proceed to her short-term loans. Based on the cash budget, some
months may need extra budget to sustain their operations. The cash budget shows that there
are months that they will reach the pick of their sales. They can pay the extra loan (short-
term) for the upcoming months.

8. Do you think that a cash budget is a more important financial tool for a small
operation such as Dinner Bell Hotel or a large firm such as Exxon? Explain.

Answer:

Cash budget is an important tool for a small operation such as Dinner Bell Hotel. A cash
budget protects a company from being unprepared for seasonal fluctuations in cash flow
which is a common factor for Dinner Bell. There is variety of reasons why cash budget is
important for both small and large oprating businesses. It helps a firm to manage its cash
position, evaluate and plan for capital needs, or basically a tool for management decision.