Discussion Board 3 – Company Cash Flow
In a situation like this where a company needs to raise short-term cash to keep the company
afloat there are a few options that should be considered. Operating Cash flow takes into account four
areas – operating income, depreciation, taxes and change in working capital (Brealey, et al.,2020, p. 69).
So, If I was the CFO of the company, I would look to influence those areas.
The first and, potentially, easiest option is to raise capital through debt. Since the cash would be
needed for two years or so, I would be looking to take on short-term debt. The addition of new debt
would help reduce the cost of capital for the company, but there is a credit risk for a struggling company
that would need to be assessed.
Another option for helping cash flow would be to take a look at the company’s equipment assets
and performing a sale-leaseback. With the sales-leaseback, there would be an immediate cash inflow by
selling our equipment for cash to a leasing company and then lease it back from them (Singer, et al.,
“Accounting”). With a leaseback plan, there would no longer be a depreciation expense, though the
lease payment would be moved to an operational expense. In addition, the leaseback would increase
current assets (cash) more than current liabilities (accounts payable from lease price), therefore equity
would be increased to bring assets and liabilities to equilibrium. Ultimately, Singer, et al. (2020) notes
that leaseback is a cheaper form of financing as well (Singer, et al., “Accounting”)
A third option would be to explore bringing in a venture capitalist. Based on the news that the
new product could not only prove to be highly profitable for the company, but also revolutionize the
industry could potentially make the company attractive for a venture capitalist. A benefit of a venture
capitalist is that, if worst comes to worst, there is no requirement in repaying venture capital. That being
said, if the product has the anticipated impact, the VC will most likely be looking for a return on their
investment tenfold.
To keep my shareholders happy, my first step would be the leaseback. By doing so, not only
would I be adding cash to the company, but there would be an anticipated increase in equity. If that does
not help keep the company afloat, I would then look at taking on new short-term debt. While this would
have a negative impact on the shareholder equity, the impact would be short-lived. Then, if all else fails, I
would turn to venture capital. Though this has the biggest impact on shareholder equity in the long-run
since it could significantly dilute the individual shareholder’s equity, it would most likely be sufficient in
buying the company the two years needed to survive. As CFO, my goal is to increase or maintain the
value for shareholders, so in raising the short-term cash, I would look to have the least impact as
possible on that area.
References
Brealey, R.A., et al. (2020). Fundamentals of Corporate Finance (10th ed.). McGraw-Hill Education.
Singer, R., et al. (2020, Jul 1). Accounting for sale and leaseback transactions: New revenue recognition
and lease accounting standards have affected the way these transactions are reported. Journal of
Accountancy. https://bi-gale-com.ezproxy.liberty.edu/global/article/GALE%7CA630170744?
u=vic_liberty&sid=summon
