A small company specializing in the sale and installation
of swimming pools was profitable but devoted very little attention to management of its working
capital. It had, for example, never prepared or used a
cash budget. To be sure that money was available for payments
as needed, the fi rm kept a minimum of $25,000 in a
checking account. At times, this account grew larger; it
totaled $43,000 on one occasion. The owner felt that this
approach to cash management worked well for the small
company because it eliminated all of the paperwork associated
with cash budgeting. Moreover, it enabled the fi rm
to pay its bills in a timely manner.
Note: In answering the questions for this situation, refer
both to this chapter and Chapter 10 where we describe
question 1 What are the advantages and weaknesses of
the minimum-cash-balance practice?
question 2 There is a saying, “If it ain’t broke, don’t fi x it.” In
view of the fi rm’s present success in paying bills promptly,
should it be encouraged to use a cash budget? Be prepared
to support your answer.
The Amigo Company manufactures motorized wheelchairs
in its Bridgeport, Michigan, plant, under the supervision of
Alden Thieme. Alden is the brother of the fi rm’s founder,
Allen Thieme. The company has 100 employees and does
$10 million in sales a year. Like many other fi rms, Amigo
is faced with increased liability insurance costs. Although
Alden is contemplating dropping all coverage, he realizes
that the users of the fi rm’s product are individuals
who have already suff ered physical and emotional pain.
Therefore, if an accident occurred and resulted in a liability
suit, a jury might be strongly tempted to favor the plaintiff .
In fact, the company is currently facing litigation. A woman
in an Amigo wheelchair was killed by a car on the street.
Because the driver of the car had no insurance, Amigo was
Question 1 Do you agree that the type of customer to
whom the Amigo Company sells should infl uence Thieme’s
decision regarding insurance?
Question 2 In what way, if any, should the outcome of the
current litigation aff ect Thieme’s decision about renewing
the company’s insurance coverage?
Question 3 What options does Amigo have if it drops all
insurance coverage? What is your recommendation?