In: Accounting
Use the statement of cash flows to support management decision-making.
The Artisan Shutter Company, like many companies that relied on the construction industry, took a financial hit when “housing bubble” burst in late 2007. Lenders were making subprime mortgage loans to borrowers who really couldn’t afford the principle and interest (P&I) payments and subsequently defaulted on their loans. This was followed, in 2008, by the collapse of Lehman Brothers, a global bank, which almost brought down the world’s financing system. Due to tighter banking regulations, many individuals and companies found it extremely challenging to secure loans. Despite the government’s decision to implement quantitative easing as a means of stimulating the economy, unemployment, personal and corporate bankruptcies increased. Looking at The Artisan Shutter Company and imagine that you were a member of the leadership team and noticed that the cash flow position of the company was being severely weakened by what economists perceived to be a pro-longer economic downturn. The owners are understandably concerned about the long-term viability of the firm. Prepare a position paper that outlines strategies to improve cash position of the company as it tries to “weather the storm” and experiences a normalizing of the economy. In order to formulate your position paper, you may want to carefully consider the problem (reflecting back to 2008 recession), collect relevant data and information, critically evaluate the alternatives, and document your recommendations using sound arguments that are well supported, properly vetted, and logically presented. It is important that management carefully consider any potential ethical implications associated with their stated position. If there are any potential ethical concerns associated with your position, they should be identified and discussed in the position paper.
The following is the paper which oulines strategies to improve cash position of the company as it tries to 'Weather the Storm " and experinces a normalizing of the problem.
In 2007, when the “housing bubble” burst, construction companies and the suppliers took a big hit. The “housing bubble” was created by private firms making subprime mortgage loans to customers who couldn’t afford them. Private firms were making 83 percent of the sub-prime mortgages . Interest rates were still so low, that banks and private firms weren’t making money on the loans, so “they turned to high-yield mortgage-backed securities. Credit rating agencies places high AAA ratings on the securities and fund managers trusted their judgement. Wall Street then started bundling the mortgages to obtain higher yields, which lead to a cycle of lenders making bad loans because they could bundle the mortgages and sell them off. Unfortunately, when adjustable rates kicked in people couldn’t afford their homes and the country seen a huge influx of foreclosed houses and stalled construction projects. When the construction companies stopped building homes, the Artisan Shutter Company lost a lot of new business and current customers started to make late payments. Insufficient cash inflows caused Artisan Shutter Company to lay off 15% of its employees. Artisan Shutter Company did not have enough cash for the daily activities. The company had a few options to help acquire cash.
Artisan Company could offer discounts to customers who make payments early. Artisan is a company that offers services on mostly credit terms and the accumulation of too many late payments from customers increases the chances of insufficient cash flow. If customers receive a discount for paying early, the company would have more cash to handle day to day operations.
Artisan Company should improve the management of the inventory. Artisan, most likely has a warehouse full of shutters that aren’t being used for services right away. The company should minimize the purchase of items they don’t use often.
The company could also run a credit check on customers to determine if they should receive credit. If the credit check is bad, the company should offer high interest to discourage payments and hopefully receive cash.
Artisan receives most of the cash through customers’ payments. The company’s best interest would be to ensure they get payments as soon as possible. As already discussed, the company could give out a discount to customers who pay early, which means that invoices should be sent to customers as soon as Artisan performs its services. The company should use most of the options discussed to help increase cash inflow.