In an executive-level report, summarize the company\'s financing needs for the f
ID: 2382357 • Letter: I
Question
In an executive-level report, summarize the company's financing needs for the forecast period and provide your recommendations for financing the planned activities. Be sure to comment on the following:
Your recommended financing solution and cost to the firm: If Genesis Energy needs operating cash, how should it fund this need? Are there internal policy changes with regard to collections or payables management you would recommend? What types of external financing are available?
Your concerns associated with the firm's cash budget. Is this a sign of weak sales performance or poor cost control? Why or why not?
Write a 7-page paper in Word format.
Genesis Cash Budget ($000) Monthly Budget Quarterly Budget Dec Jan Feb March April May June July Aug Sept Oct Nov Dec March June Sept Dec Cash Inflow Sales (Reference only) 300,000 200,000 350,000 400,000 500,000 550,000 700,000 700,000 650,000 900,000 850,000 750,000 500,000 150,000 190,000 3,000,000 2,400,000 Cash Collections on Sales 10% in month of sale 30,000 20,000 35,000 40,000 50,000 55,000 70,000 70,000 65,000 90,000 85,000 75,000 50,000 15,000 19,000 300,000 240,000 25% in first month after sale 75,000 50,000 87,500 100,000 125,000 137,500 175,000 175,000 162,500 225,000 212,500 187,500 125,000 37,500 47,500 750,000 35% in second month after sale 105,000 70,000 122,500 140,000 175,000 192,500 245,000 245,000 227,500 315,000 297,500 262,500 175,000 52,500 66,500 30% in third month after sale 90,000 60,000 105,000 120,000 150,000 165,000 210,000 210,000 195,000 270,000 255,000 225,000 150,000 45,000 Other Cash Receipts 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 Total Cash Inflow 45,000 110,000 205,000 302,500 347,500 440,000 517,500 602,500 665,000 722,500 762,500 812,500 820,000 672,500 471,500 565,000 1,116,500 Cash Outflows Material Purchases (reference only) 150,000 100,000 175,000 200,000 250,000 275,000 350,000 350,000 325,000 450,000 425,000 375,000 250,000 75,000 95,000 1,500,000 1,200,000 Payment for Material Purchase 100% in month after purchase 150,000 100,000 175,000 200,000 250,000 275,000 350,000 350,000 325,000 450,000 425,000 375,000 250,000 75,000 95,000 1,500,000 Other Cash Payments Other production cost 30% of Material cost paid month after Purchase 45,000 30,000 52,500 60,000 75,000 82,500 105,000 105,000 97,500 135,000 127,500 112,500 75,000 22,500 28,500 450,000 Selling and Marketing Expense 15,000 10,000 17,500 20,000 25,000 27,500 35,000 35,000 32,500 45,000 42,500 37,500 25,000 7,500 9,500 150,000 120,000 General and Adminstrative expenses 60,000 40,000 70,000 80,000 100,000 110,000 140,000 140,000 130,000 180,000 170,000 150,000 100,000 30,000 38,000 600,000 480,000 Interest Payment 75,000 75,000 75,000 Tax Payment 15,000 15,000 15,000 15,000 15,000 15,000 15,000 15,000 Dividend Payment Total Cash Outlfows 150,000 260,000 217,500 327,500 400,000 462,500 532,500 645,000 617,500 647,500 812,500 740,000 687,500 377,500 160,000 888,500 2,640,000 Net Cash Gain/(Loss) -105,000 -150,000 -12,500 -25,000 -52,500 -22,500 -15,000 -42,500 47,500 75,000 -50,000 72,500 132,500 295,000 311,500 -323,500 -1,523,500 Cash Flow Summary Cash Balance start of the month 15,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 Net Cash Gain/loss -105,000 -150,000 -12,500 -25,000 -52,500 -22,500 -15,000 -42,500 47,500 75,000 -50,000 72,500 132,500 295,000 311,500 -323,500 -1,523,500 Cash Balance at end of month -90,000 -125,000 12,500 0 -27,500 2,500 10,000 -17,500 72,500 100,000 -25,000 97,500 157,500 320,000 336,500 -298,500 -1,498,500 Minium cash Balance desired 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 Surplus cash (deficit) -115,000 -150,000 -12,500 -25,000 -52,500 -22,500 -15,000 -42,500 47,500 75,000 -50,000 72,500 132,500 295,000 311,500 -323,500 -1,523,500 External Financing Summary External Financing Balance at start of month 115,000 265,000 277,500 302,500 355,000 377,500 392,500 435,000 387,500 312,500 362,500 290,000 157,500 0 0 323,500 New Financing Required (negative amount from cash suplus (deficit) -115,000 -150,000 -12,500 -25,000 -52,500 -22,500 -15,000 -42,500 47,500 75,000 -50,000 72,500 132,500 295,000 311,500 -323,500 -1,523,500 External Financing Requirement -115,000 -265,000 -277,500 -302,500 -355,000 -377,500 -392,500 -435,000 -387,500 -312,500 -362,500 -290,000 -157,500 -323,500 -1,847,000 External Financing Balance 115,000 265,000 277,500 302,500 355,000 377,500 392,500 435,000 387,500 312,500 362,500 290,000 157,500 323,500 1,847,000Explanation / Answer
Genesis has the option of using short-term debt, long-term debt or equity to finance its expansion plans. Any expansion plan is done with a long-term view in mind. Hence, using short-term debt to finance expansion plan is not a good idea. As a result, Genesis should use either long-term debt or equity to finance its operations.
Lenders financing depends on the ability of the company to repay debt on time. This further depends on the sales and expenses as well as the cash collection/payment terms.
At the start of the expansion program, the company requires substantial amount of financing as is evident from the external financing balance in January and February ($175,000 and $187,500 respectively). This requirement keeps falling as the operations begin to pick up momentum as is evident from rising sales and collections.
The cash available for disposal to the company is sufficient enough to make payment towards interest or dividends. However, principal payments (in terms of short-term financing) may disrupt the day to day operations of the company. This happens when there is no sufficient cash available to the company to carry out its normal operating activities.
Before discussing on what form of financing is good, let us look at some of the pros and cons of using either source of financing. In addition, we will also discuss on the cash budgeting aspect and the terms of collections and payments.
Pros and cons of short-term debt financing:
Pros and cons of long-term debt
Pros and cons of equity
The more risky the forms of the financing, the higher will the interest requirement. In the instant case, short-term financing is available for at 8%, long-term debt is available at 9% and equity financing is available at 10%. Short-term debt is repaid in less than a year. As a result, it is less risky and requires a lower rate of interest. Long-term debt is repaid over a longer duration, usually more than a year. Also, it receives priority over equity in terms of liquidation payments. Since the duration is higher, there are chances that the recovery may not be done in its entirety. As a result, it commands a higher rate of interest compared to short-term debt. Equity holders take the highest risk by financing the company’s requirement. It receives the least priority for regular payments in terms of dividends as also the liquidation proceeds. Thus, they require a higher rate of interest for taking the highest risk.
The company’s current collection and payment policy poses a problem for the company initially at the start of the expansion plan. As a result, it requires a very high short-term financing during the first few months of operations. Genesis collection policy requires the customers to pay a higher percentage in the following months of sales and not in the month of sale. Only 10% is collected in the month of sale and 25% in the following month. That means 65% of the sales is collected in the second and third month of sale. On the other hand, the company is required to make the full payment on purchases in the following month. To add to that it is also required to make the expenses payments in the same month.
These payment terms clearly suggests that the company is trying to do business in a situation in which the suppliers have an upper hand. This means the suppliers will require early payment. On the other hand, the collections from receivables happen almost in a couple of months following the sales. As a result, the company has to depend on short-term financing for its short-term needs. This is evident in the first few months (until July), when the company is constantly requiring short-term financing. After July, the requirement becomes nil. This happens due to cumulative effect of the collection from sales of previous period and current period.
We recommend that Genesis uses short-term financing to finance its short-term deficit’s in cash and fund its expansion through a mix of debt and equity. The mix depends on the current debt equity mix. However, with dipping sales especially in the following year, it is advisable that the company should take up lower proportion of debt and higher proportion of equity. This will help the company in containing the debt payment (interest and principal amounts) and thereby focus on the growth of the company.
However, care should also be taken about the fact that existing shareholders interest are not diluted.
The company has a very unusual pattern of sales with few months showing constant sales, few increasing and few declining. In fact, in the next year, the first and second quarter show a lower amount of sales as compared to the third and fourth quarter. Hence, it is difficult to make out or decide on the pattern of sales. In such case, without a clear trend in sales, it becomes difficult to convince either debt or equity holders to finance the capital requirements.
If yearly sales are taken in to consideration, the sales in the first year were $7.05 million as compared to $5.74 million in the second year. This clearly shows that the company is not doing well in terms of sales. Growth in sales triggers too many events to occur during the year. Collections, payments, interests, taxes, dividends, etc. all follow sales. In fact interest is required to be paid at the same rate even if there is fall in sales or profits. On the other hand, the costs incurred at constant. As a result, the cash budget does not look too convincing. Both lower sales and lack of cost control are responsible.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.