As an accounting manager for a growing graphic design company you are responsibl
ID: 2349029 • Letter: A
Question
As an accounting manager for a growing graphic design company you are responsible for preparing the monthly financial statements and presenting them to the owner for evaluation. Since you have implemented many fiscal controls and new computer systems, the company continues to show improvement to the bottom line and is experiencing net income growth that exceeds the industry average for your region. This is something to be proud of. Due to this fact, the owner would like to increase her compensation 40%. She feels she should be rewarded for this increased performance. As part of this discussion you need to inform her that you are experiencing cash flow problems and you may need to increase the line of credit at the bank in order to pay suppliers and meet payroll. The owner is shocked to find that profits are up and cash is down.Explanation / Answer
lots of reasons and with the information provided you can only be very general rather than pin pointing it specifically. When cash becomes a problem it can be a sign of problems like dwindling sales lessening the gap between income and expenditure or a lead lag effect of success In the graphics business most of the expenditure is going to be related to getting sales and then people doing the work it is not a business that has to import stock to any large extent nor is it a business that is going to have to spend a lot on researching new products and so burn cash before any generated income so aside from someone fraudulently skimming cash the most likely reason for cash flow problems is something that can increase costs or slow payments: increasing costs is going to be people related, more people more subcontracting or the time taken to finish a job taking suddenly longer and so delaying the speed with which cash can be collected. Perhaps sales have suddenly been bringing in more complex deals which take longer to do and so consume more cost before they finally get billed and realize income.This makes sense too in the profitability increasing as a more complex job should yield higher profit ( if the sales guys are any good) You could take about the velocity of change being an issue, if the sales mix has changed to this new level for good then cash flow will ease if a steady state is reached and a new balance of work in-work in progress - work out - cash collected is created. things that could be done, get sales to start changing the contracts to collect some down payment and or stage payments along the process of production, change contracts to ensure cash is collected faster after delivery make sure customers pay on time, consider increasing the bank credit kine based upon the order book or factor some of the invoices to get cash immediately even if it is discounting in effect the potential ( this will degrade profit) You will be able to think of other reasons that make improving sales result in slower or lower income that are not a good sign for example quality issues returns rework or even a problem collecting cash after the work is done maybe customers defaulting on payments in this current business climate some of them could be going out of business leading to you doing the work and so generating costs billing in good faith so therefore recording a profitable sale as far as the computer is concerned but failing to collect the compensating cash for reasons beyond your control...
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