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108 CHAPTER 4 MANAGING WORKING CAPITAL AND CONTROLLING CASH ACCOUNT RECONCILIATION: A service provided by banks whereby banks reconcile a business's cash accounts and create summary reconciliation reports. SWEEP ACCOUNTS: Accounts where banks automatically invest surplus cash balances in secure overnight accounts. Earnings are usually based on the federal funds traded rate, and the interest earned is credited daily. LOCKBOX: A service whereby banks assign customers a specially numbered P.O. box and collect and process payments on a daily basis. This reduces the float time of payments. ZERO BALANCE ACCOUNTS: A service whereby cash balances of all accounts are consolidated (or zeroed out) into a single account. Banks invest the surplus funds on behalf of the business. CREDIT CARD TRANSACTION FEE: A fee that credit card companies charge to merchants for processing. Application Exercises 1. What are three key methods of minimizing the amount of working capital needed? Give an example of each. 2. The cash sales and credit sales projected for Sarah's Kitchen are as follows: Cash Credit January $17,000 40,000 February $19,840 42,000 March $16,200 48,000 April $15,380 50,000 May $17,390 49,500 5. If collections of credit sales are 70% the first month and 30% the second month, what would be the cash receipts for March April, and May? 3. Using the same data as for Exercise 4-2, If Sarah's Kitchen has a 1% bad debt allowance and can collect only 29% of accounts receivable in the second month, what would be the cash receipts for March, April, and May? 4. Discuss the zero balance accounts and lockbox services that most banks offer. List three advantages and three disadvantages of each service. Feel free to visit Internet sites for banks and other financial institutions as you determine your response. 5. Ask your manager at work what credit card processing fees your hospitality operation is charged. Explain how credit card companies determine the transaction fee percentage charged to merchants 6. Search at least three websites regarding credit card foes and compile the range of trans- action fees charged by these companies. 7. You are the manager of the Potomac Inn. You would like to pay all your employees a Christmas bonus totaling $10,000. Your Owner, Joseph, agrees with your incentive rewards but wants to make sure the Inn will generate enough cash flow in December to pay the $10,000 and still maintain a minimum $5,000 cash balance. Based on the following infor . MANAGING WORKING CAPITAL AND CONTROLLING CASH 109 mation, prepare a cash budget to determine whether or not you can afford to pay your employees their Christmas bonus, which will be $10,000 in total: October $80,000.00 November $80,000.00 December $75,000.00 Credit Sales 75% collected in next month 25% collected in two months Cash Sales Credit Purchases-paid next month Cash Purchases Payroll -35% of total sales Service on mortgage per month Insurance-prepaid every 3 months Property tax-due in November 12,500.00 30,560.00 3,116.00 25,375.00 5,000.00 3,000.00 16,390.00 34,580.00 2,159.00 33,736.50 20,590.00 28,650.00 2,489.00 33,456.50 15,000.00 What are three ways you can better manage your accounts payable? Please explain. 8. ETHICS * Eugene did not prepare a cash budget and does not use the CP system at his hotel. He finds himself short of cash and is about to play the float by sending in his accounts payable checks on their due date. By doing so, the payments will be in the mail and will take at least one additional day to reach his suppliers and then another day for them to process the checks. As of October 28, 2004, a new federal law, called Check 21, went into effect. Check 21 is designed to enable banks to process more checks through an electronic process rather than using paper checks. Electronic processing is more effi- cient and less costly. Do a search on the Internet on the Check 21 law. Is this a fair rule for the consumer? Is this a fair rule for businesses? Is Eugene being unethical in this particular case? 9. EXPLORING THE WEB * Search the Web for bank services that can assist a business in managing its cash. Compile a comparison of at least three sources regarding the fees charged for such services and the minimum account balances required by each service. Concept Check The Watree Lodge is struggling with cash flow and has been waiting until the last minute to pay its vendors. The Watree is a beautiful ski lodge located in a popular area, but during the summer months hotel guests become scarce and cash management becomes a major problem. Because the Watree is independently owned and operated, every once in a while the owners must provide additional funds to carry the business over. Mr. Tom Broli has just been hired as the controller at the Watree and is in the process of analyring all of its financial statements. The previous controller had to be replaced because he

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