In: Accounting
Ebenezer is CEO of a successful small business. One day he stops by to see Tim Cratchit, the new branch manager at First National Bank. Ebenezer and his partner Marley would like to double the size of their loan with the bank from $500,000 to $1 million. Ebenezer explains, “Business is booming, sales and earnings are up each of the past three years, and we could certainly use the funds for further business expansion.” Tim Cratchit has a big heart, and Ebenezer has been a close friend of the family. He thinks to himself this loan decision will be easy, but he asks Ebenezer to email the past three years’ financial statements as required by bank policy.
In looking over the financial statements sent by Ebenezer, Tim becomes concerned. Sales and earnings have increased just as Ebenezer said. However, receivables, inventory, and accounts payable have grown at a much faster rate than sales. Further, he notices a steady decrease in operating cash flows over the past three years, with negative operating cash flows in each of the past two years.
Who are the stakeholders? What is the ethical dilemma? Do you think Tim should go ahead and approve the loan? What does the increase in receivables and inventory possible signal? Any other comments, suggestions?
A stakeholder is a party that has an interest in a company and can either affect or be affected by the business. The stakeholders involved are the company, its employees, shareholders, banks, its employees, customers; all who are involved with the company or the bank are the stakeholders.
The ethical dilemma is whether to sanction the loan or not for the company of his close friend Ebenezer. As being a close friend, he should give a loan, but from his duty point of view, he shouldn’t because the situation of the company is not good and getting worsened year by year.
The increase in receivables, inventory, and payables signifies the bad position of company for operating cash flows financially and operationally. Since the receivables are increasing that means the customers are not paying cash, inventory increase means decrease inventory turnover and reduced sales. Accounts payable increase means increase liability and that means a company is not able to pay its suppliers due to reduced cash. And also with the reduced cash flows and negative operating cash flows, the loan shouldn’t be given; and if given should be given at a high rate considering the risk.
The loan should not be given by the banker as per the ethics of the duties of banker where the financial statements represent the negative cash flow for increasing of accounts receivables and account payables and decreasing in Inventory turnover ratio.