Question

Stairway to Heaven, Inc. makes fire safety equipment for the homeowner. The firm has been in business for four years. They have received the endorsements of insurance companies and fire departments in the states of Illinois, Indiana and Wisconsin. They have also been struggling and they have hired you to help them get past some recent cash challenges. The following are the financial statements from the past two years:
												Income Statements				Balance Sheets
	2014	2015			2014	2015
Net Sales	$    3,750,000	$   4,500,000		Cash	$        400,000	$        150,000
Cost of Goods Sold	2,250,000	2,700,000		Accounts Receivable	500,000	800,000
Gross Profit	1,500,000	1,800,000		Inventories	1,450,000	2,000,000
General & Administrative	370,000	470,000		Total Current Assets	2,350,000	2,950,000
Marketing	200,000	250,000		Net Fixed Assets	1,050,000	1,550,000
Depreciation	100,000	140,000		Total Assets	$     3,400,000	$     4,500,000
EBIT	830,000	940,000
Interest	30,000	40,000		Accounts Payable	$        300,000	$        400,000
EBT	800,000	900,000		Bank Loan	150,000	250,000
Income Taxes	250,000	300,000		Accrued Liabilities	100,000	150,000
Net Income	$        550,000	$       600,000		Total Current Liabilities	550,000	800,000
				Long Term Debt	150,000	150,000
				Common Stock	850,000	1,100,000
				Retained Earnings	1,850,000	2,450,000
				Total Liabilities and Equity	$     3,400,000	$     4,500,000
Using the template introduced in the class exercise in week 8, and adding to it if you see fit, identify opportunities and programs to improve cash flow in the company. Show all calculations below.
Hint: I am looking for these calculations, at a minimum for both 2014 and 2015:
1. cash conversion period calculations using the 4 formulas.
2. Income Statement Performance ratios
3. Liquidity ratios
4. Asset Turnover Ratios
5. Cash Burn/Cash Build and monthly burn for 2015
6. Cash runway: is cash flow situation urgent at December 31, 2015?

Answer 1

1. cash conversion cycle is inventory conversion cycle+debtors receivable cycle - creditors payout cyce

here we assume 365 days in a year

so here

(a) inventory cycle is (Average Inventory/ Net Sales)*365 =

Average Inventory = (Inventory 2014+Inventory 2015)/2

= (1450000+2000000)/2

= 1725000

Inventory Cycle is = (1725000/4500000)*365

= 140 days approx.

(b) Debtors Receivable Cycle : (Average accounts receivable/Net sales or credit sales)*365

Average Accounts Receivable= (500000+800000)/2=650000

Debtors Receivable Cycle = (650000/4500000)*365=52.72 days

(c) Creditors payout ratio=( Average accounts payable/credit purchase or net purchase )*365

Average Creditors = (300000+400000)/2= 350000

here we cost of goods sold is net purchase because information is not given about purchase

so creditors payout ratio : .(350000/2700000)*365=47.31 days

Now Cash Conversion Cycle is (a)+(b)-(c)= 140+52.72-47.31= 145.41 Days

2 Income Statement Performance Ratio :

Gross Profit Margin: (Gross Profit/Net Sales)*100= (1800000/4500000)*100=40%

Net income Margin: (Net Income after tax/Net sales)*100= (600000/4500000)*100= 13.33%

3. Liquidity Ratio is Current Asset/current Liabilities

Here

Particulars	2014	2015
Total Current Assets	2350000	2950000
Total Current Liabilities	550000	800000
Liquidity Ratio (Current Assets/Current Liab.)	2350000/550000= 4.27	2950000/800000=3.68

4. Assets Turnover Ratio = Net Sales/Average Assets

So Here Average Total Assets = (Assets of 2014+ Assets of 2015)/2

Average Total Assets = (3400000+4500000)/2 = 3950000

Assets turnover Ratio = 4500000/3950000= 1.14