In the balance sheet, cash amount declined aromatically from $120,100 in 2002 to $9,400 in 2004. Nevertheless, the amount of account receivable rose from $90,600 to $146,400, which means the financial risk of account receivable has risen. The amount of current liabilities has risen from $35,900 in 2002 to $47,300 in 2005, even though accounts payable was reducing, Overall, Horseman Horticulture Is a profitable company, but the company was not In a proper condition. What concerns you? First of all, over the past two years, the number of plant species grown at the nursery increased too fast, the business were developed fast as well.
Consequently, the proportion of the non-current assets was too large, which will result In short of liquid assets. As a business, It requires sufficient liquid assets to malignant routine operations and management, the poor condition of current assets may bring the consideration of going concern problem. This problem raised doubt about their abilities to continue operating in the future. Secondly, the significant rise in account receivable would bring financial risks of the company’s profit or cash flow, the company was suffering high risks from lack of working capital.
As Mike Peril, the Principal of Cohn Medal said, the risks occurred when particular customers can not pay what they owed to the company, which will generate unexpected losses to the company. The impacts would be serious even a company operated successfully. Thirdly, the manager of the company determined to maintain financial responsibility by avoiding debt and paying suppliers early which stemmed from inventory risk. This strategy may not applicable in the business as it may raise much cash outflow from the company.
Fourthly, the inventories are woody shrubs, other plants and annuals, he company may easily suffer unexpected losses from damage of the Inventories. Lastly, the amount of employees’ salaries was the family’s inure Income, which was a bit high. 2. Where is the cash going? The annual revenue was growing. One of the reasons is that the accounts receivable increased so fast causing the large amounts of cash generated from the business had not been collected successfully. Further, the manager preferred paying interests as quickly as possible, and making payment to their suppliers early enough to obtain discounts.
Finally, the cash would be spent to purchase large amounts of inventories, ND to pay their workers and employees. 3. Will strong business performance in 2007 improve the cash position? Even under the stronger business performance in 2007, the cash position will still be low under the business model. Because of the strong business performance may Just raise the accounts receivable and the inventory, but cash will be taken on returning payable and detained on accounts receivable and inventory. 4. Do you agree with Maggie Brown’s accounts-payable policy? I do not agree with Maggie Brown’s accounts- payable policy.
Maggie decided to return the bank borrowing and accounts payable s soon as possible. As she thought in this way, the company could receive a 2% discount for payments from most of its suppliers and reduce the risk to hardly pay debts, which caused by the bad weather affecting on the inventory. Therefore, the data on accounts payable and other payable are such low. However, if so, the cash will keep decreasing and be negative on 2006. This will bring a big problem on company’s financial condition, as the company does not have enough cash to operate or even pay salary, even if it owns a large accounts receivable and inventory. . What are the alternatives for solving the business’s cash problem? This can happen by incentives the largest customers to pay faster through discounts for early payments or other benefits. We can mitigate the risk of non-payment by acquiring credit insurance or using factoring. One solution is to manage payable. Some suppliers are more important than others. Some bills are more important than others. Thus, choose which one is more important and work with suppliers and communicate that they will be paid, Just not on their terms. Another, more long term solution is to change the invoicing terms.
Net 15 days reduces the potential for a cash shortage. Your customers may not agree to support such changes, though, and you risk losing customers. 6. What is the problem? The internal factors are main causes of cash flow problems: 1. Over-conservative – the recent decline in the firm’s cash balance to below $10,000, but Maggie avoided bank borrowing and paid money to suppliers quickly. That lead to getting cash inflow is not faster than out flow. 2. Over capitalized – The purchase of assets that are not producing a reasonable return on investment will affect cash flow.
For example, the new shop required new fixtures and fittings however there was no increase in revenue from this investment. 3. Owners Drawings – The owners of the business withdraw more cash out of the business than the business is generating. 4. Unplanned or uncontrolled growth – This can be one of the biggest number of plant species grown at the nursery by more than 40%. ” Reference Burner, R. F. , Decades, K. M and Chill, M. J. (2010), Case Studies in Finance: Managing for Corporate Value Creation (6th De. ) Boston: McGraw-Hill, cases. Allele Hickman: UPDATE: Roars Excellent Issues Going Concern and Cash Problems (2011)
