Managing Cash Flow

Jack B. Nimble Company Suggested Solution 337
2. The granting of credit terms of 30 days to customers, which means a
month’s worth of sales for which the company will not receive immediate
cash. In the meantime, it has to expend money ahead of time for the materials
and labor that go into the products to be sold
3. Debt service—loan repayment and interest payments—that have been
incurred to handle previous tight cash situation but were not adequately
planned for by Nimble in his projections
4. Investment in fixed assets—property, plant and equipment—that Jack
feels is necessary to achieve his goals. These investments require payment
(from cash or borrowed funds) when they are purchased but provide
returns only over the lives of the assets acquired. The timing differences
have to be financed by the company, and Nimble has not taken this into
account.
An examination of the Cash Flow Projection for 20X3 quickly shows that the
company looks to be in very good shape by the end of that projection year. While
encouraging, this alone does not make the problem go away. As of the beginning
of the projection year, Nimble Company is out of cash and has several months of
negative cash flow to handle. It is this immediate problem that needs to be handled.
Additionally, there are lots of opportunities that would make the cash flow
situation even better than it looks in the projection, and these should be considered
and implemented if feasible. Finally, even with the favorable projection, there
are numbers of operational and financial problems that should be addressed to
improve the overall company financial performance.
The suggested solution attempts to point out some of the key financial and
operational areas that should be addressed, but the reader should recognize that
there are many other areas that deserve attention as well.
Financial Issues
The company’s financial structure is seriously out of alignment. The short-term
line of credit has been used not only for working capital needs, but also for capital
investment requirements. Using short-term money for long-term needs creates
a repayment problem since the benefits of those capital investments will accrue
only over the long-term. Since repayment requirements are immediate having
adequate funds to make them is difficult and in the case of Nimble Company, virtually
impossible. That is the major reason the company has been unable to zero
out the line of credit as demanded by the bank.
To solve this problem, it will be necessary to reshape the capital structure of
the company and, more immediately, to take care of the line of credit problem.
One quick and dirty, though temporary, way to deal with the line of credit issue
would be to ask the bank for a waiver of the requirement to zero out the loan. The
bank might say, “No”, in which case the company is no worse off than before. Or