Cash flow entails the amount of money that flows in and out of the company or business. Companies usually measure their cash flow after a certain period that include monthly, quarterly or annually (O’Berry, 2013). Most companies find it hard to track and manage their cash flows. Therefore, poor cash flow causes an insolvent business structure and would result in business failures. It is important if financial institutions provide companies with strategic tools and advice to remain cash-healthy and forecast their credit needs. Cash flow provides the company or business with the necessary fuel to move forward. For the case of Hal Carrier, he has realized that the company keeps on getting continuous cash flow problem. Hal could not understand why their checks bounce whenever they write them to suppliers. However, the causes of Hal’s cash flow problems might include the following.
First, Hal Carrier of Bulltuff Stock Trailer, Inc., has to pay the company’s bills immediately. However, Hal has to wait for three months to receive payments for the goods sold. The lack of correct payment terms cost the company to have cash flow problem. The period in which the company pays its bills and receive payments for the sales is long enough to build cash flow problem. For example, the company’s sales on the account are 80% of all sales. However, their terms of payment with the dealers include waiting for up to three months to receive the sales payments. Similarly, the company will consider payment to be late if the dealer does not pay the amount by the tenth date of the due month. The company pays its bills immediately before receiving payments for the sales hence building cash flow problem. For example, the workers in the company are paid each Friday for all work done in the previous week. Moreover, withholding and employment taxes are also paid each Friday.
Second, the business has grown too quickly causing cash flow problems. According to the company’s cash flow forecast, it was originally projected the sales for the year to be $ 2,450,000. But since the company is growing at a high rate, the sales are now estimated to be $5,000,000. Moreover, it is approximated that the business has grown over the last four months by 12% per month. The company is required to make added cash payment for labor, materials and sales in the month; however, it far exceeds the cash payment (30%) received from the added sales. It is vividly portrayed that the company is facing growth trap. Due to the high growth rate, the company consumes cash hence experiencing cash flow pressure. When the company pay little attention to Cash Conversion Cycle, it starves the business of what it need to prosper (Wahlen, Bradshaw, Baginski, & Stickney, 2010).
In a situation when the company faces problems with the cash flow, the analysts must come up with a developed plan to address the problem. First, if we assume that the sales for November and December of the preceding year were constant, and they also equal to the sales for the month of January, it is possible to compute an estimated cash receipts and cash payments as shown below. Similarly, we are to assume that the current growth of the business has caught Hall Carrier by surprise. On a further note, after the month of April, a constant sales growth of about 8.8% is required to be employed by the company to achieve the $5 million annual sales. Second, the financial statement below shows that Hal Carrier’s problem starts in the month of February when the amount of cash collected is approximate $34,000 less the amount disbursed. As time goes, the problem eases and by June, the company experiences a positive cash flow. Ultimately, since the company experiences crisis, Hal need some additional cash to cover the projected shortage. It will be ideal if Hal Carrier borrows the money from a financial institution to pay for the shortage. Similarly, it is advisable that Hal should contribute from his personal savings.
|Gross Sales to date||208,000||261,000||293,000||328,000||356,864||388,268|
|Credit card sales net||20,280||25,448||28,568||31,980||34,794||37,856|
|Cash & credit card sales||41,080||51,548||57,868||64,780||70,481||76,683|
|Total cash collected||207,481||232,082||261,069||299,981||331,246||362,853|
|Materials (60% of 50% of sales||62,400||125,280||140,640||157,440||171,295||186,369|
|Labor (15% of 50% of sales||15,600||31,320||35,160||39,360||42,824||46,592|
|Fixed costs (1 million/12months)||83,333||83,333||83,333||83,333||83,333||83,333|
|Total cash collected||182,133||266,033||288,433||312,933||333,138||355,121|
|Cash Over (short)||25,348||-33,952||-27,365||-12,952||-1,892||7,732|
|Total over (short)||25,348||-8,604||-35,968||-48,920||-50,812||-43,080|
O’Berry, D. (2013). Small business cash flow: Strategies for making your business a financial success. Hoboken, N.J: Wiley.
Wahlen, J. M., Bradshaw, M., Baginski, S. P., & Stickney, C. P. (2010). Financial reporting, financial statement analysis, and valuation. Mason, Ohio: South-Western.
Do you need an Original High Quality Academic Custom Essay?