Based off of the statement of cash flows, balance sheet and income statement in

Question

Based off of the statement of cash flows, balance sheet and income statement in the pictures(can also be found through link) please help me answer the following:

Management plans to increase sales in the future; to support this increase in sales, it plans to add $200,000 to inventory. They did not disclose a sales forecast. It is not unusual for a new company to experience low cash flows during its start-up phase.

What could be some sources to finance the acquisition of inventory? Would most suppliers finance the inventory for a new company?

How are sales to be budgeted or forecast? Is the lack of supporting documentation for the increase in sales a problem? Have they considered additional advertising, and hiring more sales people, for example?

An increase in sales means resources also for inventory and accounts receivable. Have they considered the cash for these resources? Many companies minimize these resources expenditures.

Should management seek outside funding for the expansion of inventory? If so, should the financing be debt, where an investor gives cash for interest payments, or should it be equity, assuming the investor will give $200,000 for a 10% interest in the company?

Explanation / Answer

1. Financing of Inventory:

a. supplier finance. Get inventory on credit from suppliers. Since we are new in industry most suppliers are not willing to give the same. So we can use some promisory notes as guarantee for suppliers. Issue Notes payable and procure inventory on credit.

   b. Other sources. Since inventory is working capital finance it is not advisable to use long term fund to meet inventory purchase cost. Find some short term borrowings or working capital finance arrangements with financial institution by creating charge on inventory.

2. Sales budget or forcast

a. Sales forcasting is possible by studying the market and economic condition. We have to analyse market demand of the product. Market research and analysis is important. Also try to understand toatl demand of product and market share we expect. Sales forcast is possible with data collected from our field staff and retailers also from overall economic condition. Increase in advertisement and hiring of more sales persons m,ay not lead to increase in sales. It shows the company's plan and expectation to increase sales.

3. Resource for increase in sales

   a. Increase in sales requires more investment in inventory and accounts receivables. The cash investment can be reduced by availing more credit from suppliers and reduce accounts collection period. Acquire inventory by credit and provide discount to debtors for prompt payment. Arrange working capital finance to meet the additional fund requirement

4.Financing of inventory

    a. Company has two options Debt and equity. The debt will cause fixed interest payment obligation. Since it is the begining period the chance of cash deficiet is high it is higly recommanded to opt for equity finance.

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