Bacterial Invasion

After reviewing the budget for February through April 2012, Randi Randall is concerned about the cash flow trend. Randi is also concerned that if any of the estimates are incorrect, the cash flow situation may become even more serious. And Randi is concerned about whether the bank is willing to increase the line of credit to provide a loan in excess of $200,000. She wanted to project the budget for a longer time period, but thought that there must be an easier way. She knew that computerized spreadsheets, such as Microsoft Excel, would be very helpful.

Randi asked her nephew, who is a whiz with spreadsheets, to prepare an electronic spreadsheet for a 13 month period (from January 2012 through January 2013). The spreadsheet can be used to perform "what if" analysis on values of the budget variables.

After reviewing the spreadsheet, Randi was not sure what to make of it. The earnings forecasts at the end of the year seem to be good, but the projected loan exceeds the line of credit available from the bank. In addition, Randi realized that the budget relies on forecasted sales, and she was not at all sure that actual sales will be the same amounts as forecasted. She thought that sales would probably be within 10 percent of the initial forecast.

Randi is concerned by the cash flow projections because the bank's maximum monthly loan amount is $200,000. So far, the bank has declined to increase the maximum loan amount. The lending officer suggested that Randi consider alternatives that will permit Cashmere Connection to stay within this credit limit.

Randi thought that the bank may reconsider the credit limit if profitability were improved. Randy suggested that they consider increasing advertising as a means of increasing sales volume. Randi spoke with a representative of Sweaters of Scotland. The representative said that some franchises increase advertising above the level that Sweaters of Scotland provides. Randi learned that radio and newspaper advertising would increase sales volume during the month in which the advertisements appeared, but that there would be negligible effects in later months. Randi also learned that the effects of advertising varied. The relation between advertising expenditures and increased sales volume is given in the following table.