Financial Management – Cyrus Brown Manufacturing
Essay Preview: Financial Management – Cyrus Brown Manufacturing
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Abstract
This document will discuss the need of outside finance for Cyrus Brown Manufacturing. It will also make a recommendation on the size of credit line needed. It will discuss the companys cash position and entertain any concerns that arise. Lastly, it will make a recommendation on whether or not a bank manager should maintain this company as a client.
Yes, the company will need outside financing. This company will need $273,750 at a minimum if these figures hold true. Whether or not, the company will need the money, they still should have a relationship with a bank for a credit line just in case. If no relationship exists, it will be difficult to obtain financing at the last minute. Once a company establishes a relationship with the bank, the company can operate more freely and with more dependability. This will give the company a better reputation to their shareholders, employees, and customers.
The minimum line of credit for this business should be $750,000 to $1 Million at minimum. If this company needs $273,750 over 4 months alone, a larger substantial credit line needs to be established. Even though the projections show the company will repay the amount due over another four months, what would happen is the projections are wrong? If sales arent as good as projected, the potential to pay off a loan that quickly is not foreseeable. Also, additional reserves may be needed in case of emergencies or collection issues. All these figures are based on sales revenues and collections. If either of these departments or both should fail, this company could require more additional financing. Therefore the $1 million line of credit would back up any possible issues that may arise.
CBMs cash position is weak. To maintain a $465,000 debt in one month and to reserve only $50,000 is not advisable. This is the main reason the high credit line is needed. If a company accumulates also half a million dollars in expenses in one month this shows poor decision making. Why not wait until the business is profiting before you invest in a new plant? Why would a company schedule the creation of a new plant in the same month as a large tax bill? These are major concerns for this company. Another concern is the large operation costs. These large costs may be able to reduce with further investigation. These large amounts on a monthly basis also require a large credit line. To cover these costs for four to five months, a million dollar line is adequate.
As a bank manager, the large negative cash positions in some months and the large operation costs with this business, it would be recommended that they review the business plan. How concrete are the collection practices? How firm are the sales figures? The operation costs are questionable as well. The uncertain reasoning of why they need to build a new plant and the timing become into question as well.