The Corporation's Need for Outside Financing
The corporation requires outside money since, due to its collecting technique, the majority of its operations are allowed to run at a loss; hence, it requires outside capital to run at a profit. In contrast to the mentioned process for collecting sales revenue, a positive ledger balance is attainable if the company collects all revenues from sales before the end of the current month. Utilizing this collection mechanism, as shown in the ledger accounting portion of the cash flow, the company has a positive cash flow by October. Such indicates that income from sales could be utilized in production enabling the company to operate at a positive cash flow. If the collection methodology currently in use is not reviewed, the company needs outside financing to supplement the massive deficits accrued from expenditures and manufacturing enabling it to run smooth operations on a positive cash flow (Bhandari & Iyer, 2013).
Q. What is the minimum line of credit that CBM will need?
The maximum amount of negative deficit the company operates at is at $882,500 while if cash was collected immediately after sales the maximum amount of deficit is $361,250. The minimum amount of credit the company may operate at is at about $882,500. Such will minimize deficit to a zero state at when the max deficit is experienced.
Q. What do you think of CBM's cash position during the budget period? Do you see any concerns for the company in this regard?
CBM’s cash position depicts lack of financial strength in the organization. This is because periodical cash statements from the books indicate that the company is operating at a very high deficit. The balance brought forward after monthly transactions, is on the negative, making it necessary for the organization to incur an additional deficit in settling new expenses in the new month. There are literarily no funds for production as the company progresses to the next month. (Faulkender, Flannery, Hankins, & Smith, 2012). The company needs to add outside financing for it to operate in a better cash position. Apart from this, the company’s expenditure in comparison to sales is not healthy enough to encourage the growth of the company over time.
Q. If you were a bank manager, would you want CBM as your client? Why or why not?
If I were a bank manager, I would not want CBM as my client because their cash position is disadvantageous to any investment options that a bank manager may aspire to make on behalf of the institution, in the aim of increasing their income and reducing their liabilities. For the company to operate at a positive cash flow, they require an enormous amount of credit compared to their current assets this would generate high-interest rates that are not possible for the company to maintain (McLean & Zhao, 2014). Besides, the input in production translates into less income acquired after product sales, this indicates that any profit generated in sales is immediately plowed back to settle expenses and deficits accrued over time such as salaries, leasing costs, taxation, etc., instead of being utilized for the implementation of future investment plans. CBM needs to analyze their production costs and sales revenue, and find the go-between estimates in production costs that would lead to greater profits in sales. Such can be achieved through reduction of fixed costs in production or increasing the level of output within the set-up. Eventually, this will lead to a greater profit margin that can offset the deficits incurred from expenses and maintain a positive cash flow in the process.
References
Bhandari, B. S., & Iyer, R. (2013). Predicting business failure using cash flow statement based measures. Managerial Finance, 39(7), 667-676.
Faulkender, M., Flannery, M. J., Hankins, K. W., & Smith, J. M. (2012). Cash flows and leverage adjustments. Journal of Financial Economics, 103(3), 632-646.
McLean, R. D., & Zhao, M. (2014). The business cycle, investor sentiment, and costly external finance. The Journal of Finance, 69(3), 1377-1409.
