The company may require outside financing due to the negative cash flows in a few months. The company will need financing only for a couple of months to be able to stay in a position where it can meet its cash requirements. It is important for a company to maintain adequate cash on hand so as to meet short term liabilities and to continue with the day to day operating activities. The minimum credit that CBM needs is $35000 in the month of March which is the beginning month for the cash flow statement. The amount of credit required increases by a significant amount in the next month. The average amount of credit required for the next months is $400000 which actually varies anywhere between $300000 to $500000.
The cash position of CBM is weak. The collections do not match with the disbursements and this has happened due to the credit policy provided to the sales. Only 25% of the sale amount is collected in the month of sale. The remaining 75% varies between the next two months. There are no other sources of income for the company. The expenses are quite a lot compared to the collections and due to this the cash position is in trouble. The expenses need to be paid on time and the company will have to opt for external financing if need be. The company has incurred maximum expenses in June and hence it is required to take a loan. During the budget period, the company should aim to increase sales or begin collection of money in the same month as of the sale. This will ensure that the amount is received in the month where sale has occurred and the same can be used to pay for the disbursements. The company should adjust the credit period for sales in a proportionate manner so as to maintain the incoming and outgoing well. The outgoing should be timed in a manner that ensures that there will not be cash deficit at the end of the month.
If I was a bank manager I would not want to have CBM as my client. This is because the company does not have enough liquidity on hand. Its cash balance is running in a deficit and if a bank was to provide a loan to the company then it may not be able to pay the interest and the principal amount. The expenses of the company have been substantially increasing and it will be required to pay for the same. The salary and income tax will also be required to be paid on time. The company has maximum disbursements in the month of August. Before granting a loan to the company, a bank will look at the capability of the company to pay interest as well as the ability to pay the principal amount. In the given case, it looks difficult for the company to be able to pay interest on time.
As for the company, its receivables do not show a large amount which is enough to cover the cash deficit. The company has made investment in plant which could be from the external borrowing made available to it. As for a loan, banks look at a lot of issues like the credit history of the company which shows the repayment of the earlier loans taken by the company. Hence to be able to judge about a company’s liquidity position, a cash flow statement will show only the cash balance at hand whereas the credit history will show the previous ability of the company in case of repayment. Judging only from the cash flow, it looks difficult for the company to gain a loan from the bank. Unless the company generates and shows additional sources of income, it will not be able to gain finance. This can be done only by increasing sales or selling on cash basis.
References
What Banks look for when reviewing a loan application. (2012, May 24). Retrieved from Biz Filings: http://www.bizfilings.com/toolkit/sbg/finance/getting-financing/what-banks-look-for-reviewing-loan-applications.aspx
