Paper, Order, or Assignment Requirements
Assessment type: Report
Black Diamond Mining is a coal mining company based in Australia.
Sixty percent (60%) of their sales are to local steel making plants that typically pay 30 days after they are invoiced.
The remaining forty percent (40%) of Black Diamond’s sales are exports to overseas steel makers who typically pay 90 days after they are invoiced. However, because of transportation distance, there is normally a one month gap in between the time an overseas sale is recorded and the day that the coal is actually received by the customer and invoiced. Black Diamond wants to stop part of its production in December 2015 and carry out large scale maintenance works over the following 2 months. This will impact upon its sales and, more importantly, its cash flow.
The CEO has asked you, as financial manager, to evaluate two alternative means of improving its cash flow.
(a) Delay payments to trade creditors. At present, Black Diamond pays its creditors invoices in 30 days. The proposed policy would be to pay 50% of its creditors in 30 days, 30% in 60 days, and 20% in 90 days. Black Diamond will incur “late payment charges” of 15% per annum for all creditors paid after 30 days.
(b) Offer discounts to trade debtors who pay cash. At present Black Diamond offers no discount for customers who pay cash up front for their orders. The proposed policy would be to offer a discount of 5% to all domestic customers who pay cash, and a 10% discount to all foreign customers who pay cash. It is expected that 30% of domestic customers and 50% of foreign customers will take up this incentive.
If any of the two alternatives were adopted, it would be applied only to the invoices received or issued in November, December, January and February.
The expected sales of Black Diamond Mining for the period 1st July 2015 to 30th June 2016 are as per below:
July 2015 $35,000,000
August 2015 $27,000,000
September 2015 $24,000,000
October 2015 $29,000,000
November 2015 $32,000,000
December 2015 $16,000,000
January 2016 $15,000,000
February 2016 $22,000,000
March 2016 $26,000,000
April 2016 $28,000,000
May 2016 $33,000,000
June 2016 $34,000,000
Black Diamond’s cost of goods sold is equal to 45% of its monthly sales value.
Management expenses are a flat $2,000,000 per month and are paid for in the month in which they are incurred.
The maintenance expenses are expected to be as per below:
December 2015: $14,000,000
January 2016: $19,000,000
All of December’s maintenance expenses are to be paid in 30 days.
70% of January’s maintenance expenses are to be paid in 30 days, whilst 30% will be paid in 60 days. In addition, a one off cash dividend of $5,000,000 will be paid to Black Diamond’s shareholders in May 2016. It is forecast that Black Diamond’s cash balance at the start of January 2016 will be $7,000,000. The company has a policy that the minimum cash balance at the end of every month is $7,000,000 and undertakes short term borrowing at a rate of 2% per month to cover any shortfalls. Any interest owed will be payable at the end of June. Any short term borrowings are repaid if the company ends a month with a cash balance surplus of more than $7,000,000.
(a) Prepare a report to the CEO of Black Diamond showing the effect on the cash flows for the period 1st January to 30th June 2016 on a month by month basis if the company:
(i) Delays payments to creditors in respect of November – February sales.
(ii) Offers discounts to trade debtors in respect of November – February sales.
(b) Provide summary cash flow budgets for the period 1st January to 30th June 2016 under each of the following alternative scenarios:
• Delay of payments to creditors
• Offering of discounts to trade debtors
• Both delayed payments to creditors and discounts to debtors
• No change is made from existing policy
(c) Advise whether the delaying of payments to creditors or the offering of discounts to debtors is worthwhile. In your advise to the directors, discuss any matters not included in (a) and (b) above which they should consider in arriving at their decision on whether to temporarily change their existing policies relating to trade creditors and trade debtors.
There is no need for external references, but if included please use the Harvard referencing system.
Maximum length of this assignment is 10 A4 pages.
Please use the report format, (table of contents, executive summary, etc..)
Please use excel for cash flow and where appropriate.