Cash Flow Statement

Sources

change from 2003 since 2001

(2003 entries minus 2001 entries)

Bank borrowing
Trade credit
Retained earnings
Cash
Accrued expenses

$233
$132
$78
$17
$15

Acounts payable /notes payable

Accumulating throughout the year but only 16% of funding sour
Drawing down cash reserves as it provides cash
Delaying payment of bills (salary)?

Total sources

$475

most financing has been from the bank and suppliers

Inventory
Accounts receivable
Mr. Stark
Long-term debt
Property

$179
$146
$105
$14
$31

Additional inventory necessary for sales?

Is offering customers credit necessary? Will commerical custome
Buy out of former partner (not recurring)
Reduced over time? Why rely on short-term financing?

Total uses

$475

GROWTH is using cash as Net Working Capital increases to fund

Uses

6% of funding source $78/$475=

16.42%

ommerical customers buy elsewhere if cash purchases are required or no discount is provided ?

financing?

al increases to fund sales

Balance Sheet for 2004

Assets
Cash
Accounts receivable
Inventory
Net PPE

$54
$432
$576
$210

Total Assets

1.50%
12%
16%

of sales
of sales
based on 2003
of sales
based on 2003
growth with sales

$1,272

Liabilities
Bank Loan
Accounts payable
Accrued expenses
Current payment of LTD
LTD

$675
$75
$52
$7
$43

Total Liabilities

$852

Equity (Retained Earnings)

$419

Total Liabilities + Equity

10

MAXIMUM is not needed at the e

days out of 365 on purchases WI
growth with sales
contractual agreement
pay $7 per year

$348 at the end of 2003

plus after-tax net income in 2004

$1,272

Income Statement for 2004

Sales
Begin Inventory
+Purchases
=
-End Inventory
COGS (minus)
Gross Profit

$3,600 Estimate provided in the case

$418 from first quarter of 2004 (already in stock)
$2,750 solve using inventory and COGS figures
$3,168
$576 Estimate based on previous years
$2,592
72%
of sales
$1,008
28%
of sales

Operating Expenses (minus)

$900

Operating Income

$108

25%

of sales

Purchase discounts (plus)

Interest (minus)

$42
2%
of new purchases =
$60 10.50% of bank loan

Net Income before tax

Tax
Net Income after tax

$90
$19 15% on $50K, 25% on next $25K, and 34%
$71 NOT available until the end of the year!
Becomes retained earnings but business is

ased on 2003
ased on 2003

customers taking longer than 30 days

not needed at the end of the year but earlier in the year
365 on purchases WITH discount

Need more than $465,000!

agreement

end of 2003
x net income in 2004

Retained earnings comes from income statement

What about seasonality?

THIS IS THE CRUCIAL NUMBER

04 (already in stock)
nd COGS figures
SOLVE for purchases

vious years

22%
of COGS based on 2002/2003
(other ways)
Not a large difference between purchases and COGS, but this can
change if ending inventory increased (bad sign if inventory is collateral of bank)

total financing cost

$18
$2,090 $660 already purchased in Q1 of 2004
must pay off $247 (near limit) owed to original bank in Spring of 2004 at same (assumed) interest rate

15%
next $25K, and 34% after
$7.50
end of the year!
1.98% of sales
ings but business is seasonal (

25%
$6.25

34%
$5.15

teral of bank)

e (assumed) interest rate

Balance Sheet for 2004

Assets
Cash
Accounts receivable
Inventory
Net PPE

$54
$432
$576
$210

Total Assets

1.50%
12%
16%

of sales
of sales
of sales
growth with sales

$1,272

Liabilities
Bank Loan
Accounts payable
Accrued expenses
Current payment of LTD
LTD

$419
$347
$52
$7
$43

Total Liabilities

$868

Equity (Retained Earnings)

$404

Total Liabilities + Equity

46

need much smaller loan if Cartwright rel

days out of 365 on purchases
growth with sales
pay $7 per year

$348 at the end of 2003

plus after-tax net income in 2004

$1,272

Income Statement for 2004

Sales
Begin Inventory
Purchases
End Inventory
COGS (minus)
Gross Profit

$3,600 Estimate
$418 from first quarter of 2004 (already in stock)
$2,750 solve using inventory and COGS figures
$3,168
$576
$2,592
72%
of sales
$1,008
28%
of sales

Operating Expenses (minus)

$900

Operating Income

$108

25%

of sales

Purchase discounts (plus)

Interest (minus)

$0
no trade discounts
$39 10.50% of bank loan

Net Income before tax

Tax
Net Income after tax

$69
$12 15% on $50K, 25% on next $25K, and 34% after
$56 lower net income when trade discounts are forgone

smaller loan if Cartwright relies on trade credit

Loan AND supplier credit are needed
365 on purchases
Is this reasonable given 30 day terms of suppliers?
NOTES Payable just instituted by sup

end of 2003
x net income in 2004

04 (already in stock)
nd COGS figures

Total financing cost

less interest on loan with smaller loan

next $25K, and 34% after

trade discounts are forgone

15%
25%
34%
$7.50
$4.63
$0.00
1.57% lower margin due higher financing cost

$39

ble just instituted by suppliers

AR
Inventory
Sales

2001
$171
$239
$1,697

2002
$222
$326
$2,013

2003
$317
$418
$2,694

AR / Sales
Inventory / Sales
(AR + Inventory) / Sales

10.08%
14.08%
24.16%

11.03%
16.19%
27.22%

11.77%
15.52%
27.28%

36.78
51.41

40.25
59.11

42.95
56.63

AR Days
Inventory Days

Growth
85.38%
74.90%
58.75%
30 days of credit implies

16.77%
10.17%

Increase in working capital needs is driven by growth, not inefficiency!

May need inventory to ensure customer demand is satisfied (lost sale may never materialize).
Customers have been slower to pay.

over 2 years

0 days of credit implies

8.33%

of sales

more than stated 30 days being offered

never materialize).

AP
COGS
AP Days

2001
$124
$1,222

2002
$192
$1,437

2003
$256
$1,950

2004
$243
$522

37.04

48.77

47.92

169.91

first quarter

Is this seasonality or financ

Delaying payment to suppliers due to upper bound of $250,000 on bank financing

Cost of Trade Credit?
2% discount if payment within 10 days
0% discount if payment within 48 days

Average days payable over last two years

Consider $100 of COGS

Pay

$98

10

days

take 2% discount

Pay

$100

48

days

Is 48 days reasonable or should this be closer to

Use

$2

38

days

Implied interest

2.04%
21.42%

per period
38
days
per year Basically, 2% per month!

Expensive NOT to take the discount.

But can't take the discount with current bank loan!

30
2.04%
27.86%

rst quarter

s this seasonality or financial difficulty?

48.34

Likely triggered notes payable!

or should this be closer to 30 days?

days for AR (collect in 40 days versus 10 days with discount)

per period
30
days
Also expensive to offer discount to customers
(assuming they take advantage of the discount and you don't raise prices by 2% before offering disco

% before offering discount)

2001
$468
$260

2002
$596
$375

2003
$776
$535

first
quarter
2004
$932
$690

Current Ratio
Declining

1.80

1.59

1.45

1.35

How easy to convert invento

Interest
EBIT

$13
$50

$20
$61

$33
$86

$10
$21

(gross profit - operating expe

Interest Coverage Ratio

Declining

3.85

3.05

2.61

2.10

WORRY for bank

Current Assets
Current Liabilities

ow easy to convert inventory to cash? Not perishable or fashionable

gross profit - operating expenses)

WORRY for bank