Jet 2 Task 5
A1.
Custom Snowboards is a company that uses financials to their benefit, they would naturally prepare a yearly budget and most likely a five-year budget with expected sales and costs, as well as the direction of the company and a growth plan. Custom Snowboards should clean up their financials before pursuing an expansion. A clean-up should begin well in advance to requesting funding for growth or expansion. One way to make the financials look better might be to care less inventory on-hand by using Just-It-Time (JIT) models. Custom Snowboards does not appear to carry a lot of excess inventory, but every little bit helps the cash flow. Year 12 year-end inventory was $36,900 Year 13 year-end inventory was $37,080 Year 14 year-end inventory was $35,820
Inventory is bound to fluctuate with sales and projected sales, but working with their vendors to use the JIT model to their benefit.
Another way in help increase their cash flow would be to collect more receivables. In year 14 the ending Accounts Receivable balance is only about 3% of Sales. This does not seem very high, but external factors could help to make this look better or worse depending upon the circumstances. For example, if the industry average for account receivable is 5%, then Custom Snowboards’ would appear to be in a better situation than the average snowboard manufacturer. Reviewing Custom Snowboards Horizontal Analysis, it appears they have already begun reducing the accounts receivable, as well as reducing Notes Payable, Mortgage payable, and short and long term investments.
A third option deals with accounts payable. Custom Snowboards might be able to negotiate longer terms with their vendors. With longer payment terms they could stretch their cash flow a little. If the extended terms are not needed the company could make payments within normal terms, usually 30 days. On time and early payments to vendors shows an ability and want to pay their bills.
After cleaning up
Custom Snowboards is a company that uses financials to their benefit, they would naturally prepare a yearly budget and most likely a five-year budget with expected sales and costs, as well as the direction of the company and a growth plan. Custom Snowboards should clean up their financials before pursuing an expansion. A clean-up should begin well in advance to requesting funding for growth or expansion. One way to make the financials look better might be to care less inventory on-hand by using Just-It-Time (JIT) models. Custom Snowboards does not appear to carry a lot of excess inventory, but every little bit helps the cash flow. Year 12 year-end inventory was $36,900 Year 13 year-end inventory was $37,080 Year 14 year-end inventory was $35,820
Inventory is bound to fluctuate with sales and projected sales, but working with their vendors to use the JIT model to their benefit.
Another way in help increase their cash flow would be to collect more receivables. In year 14 the ending Accounts Receivable balance is only about 3% of Sales. This does not seem very high, but external factors could help to make this look better or worse depending upon the circumstances. For example, if the industry average for account receivable is 5%, then Custom Snowboards’ would appear to be in a better situation than the average snowboard manufacturer. Reviewing Custom Snowboards Horizontal Analysis, it appears they have already begun reducing the accounts receivable, as well as reducing Notes Payable, Mortgage payable, and short and long term investments.
A third option deals with accounts payable. Custom Snowboards might be able to negotiate longer terms with their vendors. With longer payment terms they could stretch their cash flow a little. If the extended terms are not needed the company could make payments within normal terms, usually 30 days. On time and early payments to vendors shows an ability and want to pay their bills.
After cleaning up
References: Kantrovich, A. (2011). Financial Ratios Part 12 of 21: Capital Debt Repayment Capacity. Michigan State University Extension. Retrieved from http://msue.anr.msu.edu/news/financial_ratios_part_12_of_21_capital_debt_repayment_capacity