Case Analysis

on
Dr. Jones
(Case #9- Cash Budget)

I. SYNTHESIS

A. Introduction

Dr. Roger Jones is a successful dentist but is experiencing recurring financial

difficulties. For example, Jones owns his office building, which he leased to the
professional corporation that housed his dental practice (he owns all shares in the
corporation). After the corporation’s failure to pay payroll taxes for the past six months,
however, the Internal Revenue Service is threatening to impound the business and sell
its assets. Also, the corporation has had difficulty paying its suppliers, owing one of them
over $200,000 plus interest. In the past, Jones had borrowed money on the equity in
either his personal residence or his office building, but he has grown weary of these
recurring problems and has hired a local consultant for advice.

b. Case Facts/Information
  Benefits include Jones’s share of social security and a health insurance premium for all
employees.
 Although all revenues billed in a month are not collected, the cash flowing into the
business is approximately equal to the month’s billings because of collections from prior
months.
 The office is open Monday through Thursday from 9:00 A.M. to 4:00 P.M. and on Friday
from 9:00 A.M. to 12:30 P.M. A total of 32 hours are worked each week. Additional hours
could be worked, but Jones is reluctant to do so because of other personal endeavors
that he enjoys.
 He estimates that dentist assistants are busy about 65 to 70% of the time.

II. POINT OF VIEW

The group is taking the point of view of Dr. Jones.

III. PROBLEM STATEMENT

What can Dr. Jones do to solve the financial problems (i.e. cash deficiency) and
generate a positive net cash flow where cash available is greater than cash needs?

IV. OBJECTIVES

1. To formalize management’s expectations regarding sales, prices, and cost and be able
to anticipate receipts and disbursements
2. To look ahead and identify what actions should be taken to avoid cash deficiency
3. To look ahead and identify what actions should be taken to realize positive net cash
flow

V. AREAS OF CONSIDERATION

A. ANALYSIS

● Stakeholders
o Dr. Jones- concerned with the financial performance and cash position of the
business
o Customers- concerned primarily on fairness of price and long term trusting
relationship
o Employees- concerned with how well a company is carrying out its business as it
could have implications on their job security and income

● Conceptual and Computational Analysis

 B. ASSUMPTIONS

1. Expected cash receipts include ALL sources of cash for the period being considered.
2. All expenses that do not require a cash outlay are excluded from the list (e.g.
depreciation)
3. The demand for dental services is stable

C. SWOT ANALYSIS

STRENGTH WEAKNESSES

1.Various channels of revenue generation 1. Some staffs are idle or not fully utilized\
such as filling, crowns, root canals,
bridges, extractions, cleaning, X-rays 2. Existing loan

2. The elasticity of demand as to price is

low. Thus, an increase in price of dental
services does not necessarily reduce
demand

OPPORTUNITIES THREATS

1.Increase in population 1. Possible increase in the costs of dental

supplies and equipment
2. Increase in HMO benefits from
employers reducing out-of-pocket cost of
dental patients

3. Additional dental service to offer

VI. ALTERNATIVE COURSES OF ACTION

1. Extend operating hours

Pros:
 Possibility of generating incremental profit which will turn to incremental cash flow
 Ability to cater patients who are reluctant to lose work hours during the day

Cons:
 Additional hours entails additional salaries for staff’s increase in working time,
additional utility consumption and others
 Increasing office hours may not increase business.
  If business does not increase as projected, the cash flow deficiency could be
worsen rather than corrected.

2. Eliminate one dental assistant

Pros:
 Generation of savings from salaries and benefits

Cons:
 May not be feasible as it may slash Jones’ family income
 Will cast burden to the receptionist to help/ assist in the dental operations and
miss some phone calls and ignore incoming patients
 Will cast burden to the dental assistant left

3. Increase the fees charged for the various dental services and charge additional
fee for appointments beyond operating hours.

Pros:
 Since demand is relatively stable and has a low elasticity to price, the increase in
price, in effect, would be additional income which could lead to additional cash
inflow.
 Can cater patients beyond operating hours but with additional fees and provide
additional income to staffs

Cons:
 Impact of price increase in comparison to other dentists in the area.
 Possible increase in cost

Criteria Weight ACA1 ACA2 ACA3

Profitability 35% 28% 28% 32%

Win – Win 35% 28% 20% 32%

Impact

Ethical/ 30% 20% 20% 22%

Economic
Considerations

TOTAL 100% 76% 68% 86%

VII. RECOMMENDATION

The group recommends ACA 3 because it has the highest impact on profitability, it is a win-win
approach which will benefit the business, the customers and suppliers in general and considers
behavioral (ethical and economic) principles.

VIII. IMPLEMENTATION PLAN

METHODS/ACTION STEPS

1. Prepare cash budget based on initial/current scenario.

2. Prepare cash budgets based on the 3 alternative courses of actions to check the
impact on net cash flow

3. Choose the one with higher net cash flow impact while considering ethical principle

4. Make sure that your customers are satisfied with your service before an increase in
price is implemented. Be especially diligent about proving your worth in the months
before you do so.

5. Offer discounts based on numbers of appointments and/or provide bundled services

to reduce price increase impact.

6. Be ready for backlash. Some might change preference and go to cheaper dental
clinics. Make sure to get new market.

IX. LEARNING POINTS

 The Cash Budget is critically essential to the survival of businesses. It tells managers
how much cash is available to cover anticipated expenses. Shortfalls of cash must be
anticipated and handled through generation of additional income to increase cash inflow,
reduction in expenses or financing.

 Budgeting is a dynamic process. As the budget is developed, new information becomes

available, and better plans can be formulated.

 The success of a budgetary system depends on how seriously human factors are
considered. Targets and budgets should be SMART. It should be workable on the side
of employees and should consider ethical principles.