Financial Management: Clarkson Lumumba Company (Case study Analysis)
Despite the company’s consistent profitability, it had experienced cash shortages. From the analysis of net income and sales, their profitability had grown in 1993-199. The rising sales and growth were as a result of increasing demand in the company. Although from the detailed analysis of financial position and statement of financial performance, it is noted that the company needs additional funds that will finance business activities and solve the challenge of cash shortages. Also, the company account receivables increased, which shows that it was getting some challenges in collecting more cash, and account payables decreased, which indicates that the company paid more cash leading to a shortage of cash. Another evidence was that the profitability of the company was low at 1.7% and also the sales ratio in 1995 was low at 1.2%.
Mr. Clarkson had to meet his financial needs by borrowing from the National bank and delaying payments to suppliers. The analysis shows that the company was facing cash shortages. The operating margins were also low; Mr. Clarkson was able to maintain up to $399,000 banknote and an operating leverage trade credit. For the past few years, Mr. Clarkson was able to finance the company operations by use of any means. Still, in 1995 the company could not increase debts, and current liabilities were also increasing.
The projected income statement and balance sheet analysis shows that in 1996 the net income is expected to rise, which will make the company able to pay the bank loans. On the other hand, there is a rise in liabilities due to the additional funds borrowed from the bank. Due to the increase in account receivable and inventory, there is a need for additional funds. I do not agree with Mr. Clarkson’s estimate of the Company requirements. The $750,000 is not enough. He should borrow more than that. The company balance sheet in 1996 with a discount and without a discount is sufficient evidence to show that the company needs more than $750,000 to meet all the financial needs. If the company does not require all the trade discounts, the expected borrowings should be $905,000, if there are no trade discounts at all the company $1,112,000 finance the business expansion.
From the analysis of the firm financial statements, I would advise Mr. Clarkson to borrow additional funds for the business expansion. There is a need to make improvements to the inventories and account receivables, and he may decide to offer his customers trade discounts on all payments. The necessary inventory in the company should be maintained, reducing the unnecessary one. Trade discounts to the customers will improve the profit of the company. As a financial advisor, I will advise Mr. Clarkson to avoid the available low profits outlets because they may bring a low return on the sales and assets. Also, reducing low profits outlets will reduce the cash flow issues in the firm. All funds borrowed should be used and invested well so that the business will not experience cash shortages in the future.
Mr. Clarkson is facing a lot of cash troubles during the financial period. As a bank, I will not approve Mr. Clarkson’s loan request regardless of his excellent creditworthiness history and can be relied on there is a need to consider other factors such as cash shortages in the firm. As a bank, I cannot risk giving Clarkson loan unless he finds a way to improve his cash flow system. On the other hand, the economic values added shows Mr. Clarkson’s idea for expansion will add value for the company or not. If there a positive spread of economy, the company should cope with the change; otherwise, Mr. Clarkson should remain at the current level. The analysis indicates that the expansion program is negative; thus, the company should not expand and continue with the current level of production.