When the California real estate market crashed, Artisan Shutter Company encountered severe cash flow problems. Half of the company’s customers started making late payments. Eventually, the company had to lay off 15% of its employees due to insufficient cash inflows.
The primary purpose of the statement of cash flows is to provide details on the sources of case inflows and the uses of the firm’s cash that result from operating, investing, and financing activities over a period of time (month, quarter, annual). The operating activities include the cash effect of all transactions that result in revenues and expenses and determine the firm’s net income (if for-profit) and net assets (if non-profit). Investing activities refer to the sources and uses of cash resulting from the purchase or disposal of long-term assets or the lending of capital to other companies. Finally, the financing activities include obtaining cash from issuing debt (bonds and notes) or raising capital through the sale of equities on the primary market or declaring and paying dividends to stockholders; redeeming long-term debt or engaging in a stock buyback; executing call options on corporate bonds. Now, as a management official, it’s important to realize the connection between a company’s product life cycle and the statement of cash flows. There are four (4) phases in the life cycle of a product: 1) introduction, 2) growth, 3) maturity, and 4) decline. The phases within the life cycle don’t change based on the product, but the rate in which products move through the four phases may vary considerably based on changes in supply and demand which are brought about by new entrants in to a market (substitutes), economic downturns, changes in production costs to mention a few. While the product life cycle curve does a reasonably good job approximating sales and profits as products move through the four phases, it wouldn’t be prudent for management to rely solely on the life cycle to predict sales and profits. When a product is in the introductory phase, the cash from operating activities and cash from investing are negative whereas cash from financing is positive. As the product enters the growth phase, the cash provided by operating activities become positive; however, is not adequate to cover the investing needs of the firm. As the product enters the maturity phase, cash from operating activities exceed the firm’s investment needs which, in turn, permit the retirement of debt. When entering the final phase, decline, the cash from operating activities becomes negative; however, cash from investing activities becomes positive since it is assumes that the firm with sell off assets and the financing activities become more negative. Financial data from the statement of cash flow coupled with data contained within the balance sheet and income statement can be used to evaluate a company’s liquidity and solvency position, not to mention it’s free cash flow (FCF) which can be used to expand the business.
Garrison, R., Noreen, E., & Brewer, P. (2014). Managerial accounting (15th ed.). Columbus, OH: McGraw-Hill Education.
Unit Learning Outcomes
ULO 4. Use the statement of cash flows to support management decision-making. (CLO 4 and 7)
The Artisan Shutter Company, like many companies that relied on the construction industry, took a financial hit when “housing bubble” burst in late 2007. Lenders were making subprime mortgage loans to borrowers who really couldn’t afford the principle and interest (P&I) payments and subsequently defaulted on their loans. This was followed, in 2008, by the collapse of Lehman Brothers, a global bank, which almost brought down the world’s financing system. Due to tighter banking regulations, many individuals and companies found it extremely challenging to secure loans. Despite the government’s decision to implement quantitative easing as a means of stimulating the economy, unemployment, personal and corporate bankruptcies increased. Looking at The Artisan Shutter Company and imagine that you were a member of the leadership team and noticed that the cash flow position of the company was being severely weakened by what economists perceived to be a pro-longer economic downturn. The owners are understandably concerned about the long-term viability of the firm.
Prepare a position paper that outlines strategies to improve cash position of the company as it tries to “weather the storm” and experiences a normalizing of the economy.
In order to formulate your position paper, you may want to carefully consider the problem (reflecting back to 2008 recession), collect relevant data and information, critically evaluate the alternatives, and document your recommendations using sound arguments that are well supported, properly vetted, and logically presented.
It is important that management carefully consider any potential ethical implications associated with their stated position. If there are any potential ethical concerns associated with your position, they should be identified and discussed in the position paper.
If you prepared your response in Word, the document should be prepared consistent with the APA writing style (6th edition) and reflect higher level cognitive processing (analysis, synthesis, and or evaluation).