Discussion 2 - Need It In 20 Hours Max

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Module 5 Struggle Cash Flow

COLLAPSE

As a Credit Analyst for a community bank it is my responsibility to look at a company's "cash flow" and determine their ability to repay debt. The debt they are asking for is an investment to (hopefully) improve the overall strength and production of the company. However for every twenty-five good company's and businesses, there is one that limps along and struggles with cash flow and ultimately to repay their debts, let alone there shareholders, or themselves. If I was the financial manager of the company described above, I would have to find a way to "limp" my company through two painful and risky years.

With money inevitably gone in a six month period, and production of an earth-shattering product not being available for two years, the first and most important thing I would do is raise more capital. Of course the capital being raised would be hard earned capital because many people don't want to tie up their money for two years with no immediate returns, and the only chance of a return at all comes from a "break-through" product. That being said I would have High risk high reward share of stocks to be sold to raise more capital. The NPV of the project will require a higher return due to a higher discount rate the project will have since it needs funding now but won’t see cash flow from the funding for at least two years. This means stock that is going to be sold will cost the company more upfront to entice investors in a hurry up and wait game for two years. The payoff will be worth it after two years, but that’s two years there cash is tied up treading water for a substandard company.

I would present the following to the stakeholders and everyone with an interest in the company:

Funds are needed to keep production going for two years. While no return will be guaranteed for at least two years. The return after that period will be enough to make the investment a positive one. I would offer more shares at a lower cost (if possible) to ensure investors that any return on their investment will be big.

Budgeting would be first and most important thing I would do. I would cut every cost I reasonably could without putting the new product in jeopardy. I would stretch any and all money as thin as possible to ensure it was being maximized towards the production of the new product.

I would put together a forecast and budget for the next two years and show them exactly where and to what their money is going towards. At the end of that two year period, I would show them ROI numbers and how they will slowly climb to positive amounts and ultimately payback all of their investments with interest.

In the end, I would convince investors and shareholders that their money was being used wisely with forecasts and projections, they will see their returns in the future years that after a certain amount of time, will be higher than the current discount rate. A strict two years of budgeting and cutting costs would be implemented to ensure the maximum efficiency was being obtained from investment funding. If issues were to come up over those two years and more funding were to be needed, I would speak with Banks about possibly putting our debts on interest-only payments for the remainder of the two years. Other necessary measures may have to be taken such as small layoffs’, or trying someway to expedite the timeline of this new product.

Brealey, R. A. (2011). Fundamentals of Corporate Finance (9th ed.). Atlanta, GA: McGraw-Hill Education. Section 13.2 Cash flows

W. (2013, March 01). Budgeting in a Small Business. Retrieved September 22, 2018, from https://msu.edu/course/prr/371/Budgeting #1/small businessbudget1.html