Central problem in financial terms

Case 0Shah Hussain244948Business Management CasesIn my opinion central problem in financial term of company is that in peak seasons company runs out of cash and need to borrow loan from bank with higher interest rate, thus affecting its short term financing risk and liquidity. Because you cannot predict the sales and profit of the company due to very tough competition and ever changing demand in the market. Therefore, there might be a risk that company becomes unable to pay the loan on time.

Central problem in financial terms

Current StatusSolution criteriaFierce competition is resulting in short life of design and pricing of products.

Marketing channel can be increased and more exhibitions to know about the style and color customers like, so that better forecast about demands in the market.High rate of product failure.

Marketing View Point

Current StatusSolution CriteriaMaintenance cost is high.Level production greatly reduces the maintenance cost as it uses the machine only in high demand season.More wages to pay.Skilled worker are readily available.Training needed for new employees.No training required.Operational View PointCOGS assumed to be 60%In thousand of dollars

Interest income is 2% on monthly cash balances. Interest expense includes the coupon rate 8% on the long term date, interest rate of 6% and 11% (if exceeding 2 million dollars on the line of credit.

Actual Net SavingsJanuaryFebruaryMarchAprilMayJuneJulyAugustSeptemberOctoberNovemberDecember TotalSales702486414378162180378540297025205724354618000COGS421.2291.6248.4226.897.2108226.8324178215123434.42127.610800Wage and maintenance savings480,000Hiring and training cost savings600,000Net Income before any charge1,080,000Interest expenseNo ideaReduction in interest expense 16,140Increase in storage cost300,000Net Pretax Income1,080,000 - 16,140 - 300,000 - Interest expenseCorporal Tax34%Net IncomeNet pretax income - 34% of pretax income Yes, the new savings indeed justify the potential risk company is taking by increasing the inventory value up to $6,483,000Justifies the Potential risk at the start of peak season, but there is still some bank finance risk. Bank loan can also be replaced by asking suppliers to wait for 90 days instead of 30 days.

Satisfying Level ProductionWe can conduct sensitivity analysis by changing variables like inventory cost with respect to cash. This way company can predict how much loan they require and how to adjust accordingly.

Sensitivity Analysis