Question

Schools across Ghana have been closed down. This is to curb the spread of the fast-spreading coronavirus (COVID- 19). The news portal, the Ghanaweb reported this on the 16th March 2020. Since then, school fees and feeding fee collection from parents has come to a standstill. “Yet the payment of bills such as salaries, rent, electricity bill, water bill has not come to a standstill” lamented Mr. Amuzu, the headmaster of Twinkle Tots International school in a telephone conversation with Mr. Berko- the school’s accountant. Mr. Berko decided to offer some advice to Mr. Amuzu on how the school could settle its outstanding bills due in the next six months. This way, the school could continue to stay afloat. What advice do you think Mr. Berko offered to Mr. Amuzu on settling the school's bills? Discuss comprehensively.

please use business finance principles to answer the question

Answer 1

As a result of lock down during the COVID 19 pandemic , schhools like other business organizations are facing the cash flow crisis. As the inflow of revenue and cash flow has frozen , the organizations are feeling the pinch to run the day to day activities . As the expense bills like salaries, rent, utilities have not stopped , there is a need to take some urgent measures to solve the proble.

Mr Berko can advise Mr Amuzu on how to handle the working capital issue. Working capital management is a very popular business finance management subject and it is a challenge that every business faces. In the current situation ,the Twinkle Tots school has less current asset in the form of cash or bank balance and have huge current liabilities like slaraies, rent and utility bills payable. Generally the current liabilities are met from current assets, in the absence of that , the alternative is to approach the bank or financial institution for getting short term working capital loan.

Keeping in mind the COVID related business crisis , most of the Govt are taking measure to provide liquidity ans has asked banks to provide low interest short term loans to businesses. Mr Berko can talk with Mr Amuzu to approach a bank for getting some short term capital to tide over the crisis. The working capital loan can be used to pay the liabilities for few month and when the situation improves and collection from parents resume, the bank loan can be repaid. There is of course an interest cost , the school can take up the issue with parents to make a temporary increase in school fees next session to recover the interest cost.

Sometimes bank ask for collateral to provide a loan at even cheaper rate. The school can think of that as well to reduce the interest burden.

This way , by efficient working capital management , the liquidity crisis can be tackled.