Genesis Energy Cash Position Analysis

Genesis Energy Cash Position Analysis

Financial Management | B6022-P A01

Module 3, Assignment 2

A brief analysis of Genesis Energy’s cash flow statements shows that the company has strong sales but weak cost control. Apart from the reduced sales revenue in December which could just be as a result of seasonal factors; the company is growing as we show a steady pattern of an increase in monthly sales. However, with only ten percent of sales collected in the month of sale, and the rest of the ninety percent collected in the first, second and third month after sale, it is taking the company an average of over ninety days to collect sales revenue. Late collection on sales indicates ineffective accounts receivable management. The company is operating on a very high days sales outstanding (DSO) or average collection period (ACP), which is the average length of time that the firm must wait after making a sale before receiving cash (Brigham & Ehrhardt, 2010).

In total, when all the sources and uses of cash are netted, Genesis Energy’s cash outflow exceeds its inflow every single month until August. This indicates that for over half the year, the company does not maximize its cash inflows. Downward trends or negative net cash flow from operations almost always indicate problems (Brigham & Ehrhardt, 2010). Full payment to material suppliers and other production costs are being made the month after purchase, even though all the cash from sales are not received for over three months after sales. Although this can be viewed as is a positive element as it shows that the company is meeting its accounts payable obligations on a timely basis, it also indicates ineffective accounts payable management as this will increase external cash requirement. Collecting accounts receivable on a timely manner and negotiating better accounts payable terms will help the company’s cash flow, which may in turn reduce the amount of external financing required and therefore reduced interest payment.

The company’s cash flow summary shows that external financing in the region of $450,000 to $550,000 will be required for the first eighteen months and this amount will increase from the third quarter of the subsequent year to $2,400,000. As mentioned above, external financing can be reduced by negotiating better accounts payable terms and collecting accounts receivable on a timely manner. Since the company may require financing for over a year, long term financing is recommended. Capital borrowed for a period longer than one year is classified as long term financing. This can take the form of debt financing like loans and bonds, which involves repaying borrowed funds plus interest at a predetermined time in the future, or equity financing, which involves giving up a portion of the ownership of the business in exchange for the capital raised in form of common or preferred stock. The company’s cash flow analysis shows that interest of $75,000 is paid every year which indicates that Genesis Energy has an existing loan. Equity financing has several advantages. For example, unlike debt financing which involves loans with interest repayment, there is no obligation to pay dividends to shareholders and there is no fixed maturity. Therefore Genesis Energy can raise capital by issuing new shares, or by retaining and reinvesting earnings. Rather than distribute earnings to its shareholders, earnings can be reinvested as capital. The interest of $75,000 paid in December will be eliminated with equity financing.

Bearing in mind the financial stress Genesis Energy is undergoing, it is very unlikely that dividends are going to be paid to shareholders in the very near future. The company does not currently have enough working capital which means that earnings will be affected.

Comparing the estimated external financing that will be required of $550,000 within the first eighteen months, and $2,400,000 long term, because of the added benefits, it will be beneficial for Genesis Energy to seek long term financing at 9% or equity at 10%. Since the interest rate difference is only 1%.

Reference

Brigham, E. F., & Ehrhardt, M. C. (2010). Financial Management: Theory and Practice, 13e,

13th Edition. [VitalSource Bookshelf version]. Retrieved from http://digitalbookshelf.argosy.edu/books/1111894922/id/ch03lev1sec1

Financing Options

Short TermLong TermEquity

Interest Rate8%9%10%

External Financing

550,000 44,000 49,500 55,000

2,400,000 192,000 216,000 240,000

Annual Interest

Genesis Cash Budget ($000)

DecJanFebMarchAprilMayJuneJulyAugSeptOctNovDecMarchJuneSeptDec

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 (Rental Income)

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 - 5% of Sales

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 20% of Sales

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)

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

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) (150,000) 12,500 - (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

Surplus cash (deficit)

(25,000) (25,000) (12,500) (25,000) (25,000) (22,500) (15,000) (25,000) - - (25,000) - - - - (25,000) (25,000)

External Financing Summary

External Financing Balance

at start of month

15,000 (115,000) (290,000) (302,500) (327,500) (380,000) (402,500) (417,500) (460,000) (460,000) (460,000) (510,000) (510,000) (510,000) (510,000) (510,000) (833,500)

New Financing Required

(negative amount from cash

suplus (deficit)

(25,000) (25,000) (12,500) (25,000) (25,000) (22,500) (15,000) (25,000) - - (25,000) - - - - (25,000) (25,000)

External Financing Requirement

(115,000) (175,000) (12,500) (25,000) (52,500) (22,500) (15,000) (42,500) - - (50,000) - - - - (323,500) (1,523,500)

External Financing Balance

(115,000) (290,000) (302,500) (327,500) (380,000) (402,500) (417,500) (460,000) (460,000) (460,000) (510,000) (510,000) (510,000) (510,000) (510,000) (833,500) (2,357,000)

Monthly BudgetQuarterly Budget