Cash Budgeting Case Study
Beaver Creek Clinic
Beaver Creek is an upscale winter resort located a short distance from Vail, Colorado. Beaver Creek Clinic is a small walk-in clinic located adjacent to the primary ski area. The clinic specializes in the treatment of injuries sustained while skiing. It is owned and operated by two physicians: James Peterson, an orthopedist, and Amanda Cook, an internist. The clinic has an outside accountant who takes care of payroll matters, but Dr. Cook does all the other financial work for the clinic. However, to help in that task, the clinic recently hired a part-time MBA student, Doug Washington.
On a Wednesday afternoon in October 2006, Dr. Cook called Doug into her office to tell him that she had just received a phone call from the head of commercial lending at the First Bank of Denver, the clinic’s primary lender. Because of a forecasted reduction in bank deposits, and hence funds available to make commercial loans, First Bank has asked each of its commercial loan customers for an estimate of its borrowing requirements for the first half of 2007.
Dr. Cook had a previously scheduled meeting at First Bank the following Monday to discuss cash management services, so she asked Doug to come up with an estimate of the clinic’s line of credit requirements to submit at the meeting. A line of credit is a short-term loan agreement by which a bank agrees to lend a business some specified maximum amount. The business can borrow (“draw down”) against the credit line at any time it is in force, which is usually no longer than one year. When a line expires, it will have to be renegotiated if it is still needed. The amount borrowed on the line, or some lesser amount, can be repaid at any time, but the full amount borrowed must be repaid at expiration. Typically, interest is charged daily on the amount drawn down, and a commitment fee is required upfront to secure the line. In general, lines of credit are used by businesses to meet temporary…