Academic journal article Journal of the International Academy for Case Studies

Cash Problems at Cape Chemical

Academic journal article Journal of the International Academy for Case Studies

Cash Problems at Cape Chemical

Article excerpt

CASE DESCRIPTION

The primary subject matter of this case concerns managing a firm's cash flow. Case requires students to evaluate a number of proposed alternatives to address a projected cash short fall as well as develop additional courses of action. The case requires students to have an introductory knowledge of general business issues thus the case has a difficulty level of three (junior level) or higher. The case is designed to be taught in one class session of approximately 1.25 hours and is expected to require 1-2 hours of preparation time from the students.

CASE SYNOPSIS

Cape Chemical is a regional distributor of liquid and dry chemicals. Revenues and profits have grown steadily. The sales growth has required the acquisition of additional fixed assets and current assets. Financing the additional assets has placed a strain on the firm's ability to raise capital. While the company ended last year with a healthy cash balance, there were many occasions during the year that it was necessary to obtain short-term bank loans in order to keep the company operating. As part of the firm's annual planning process, the finance and accounting staff prepare a projected income statement and balance sheet for the coming year. This year, Kathy Ford, the company's chief financial officer, directed David Bush, the firm's budget analyst, to also develop a monthly cash budget in an effort to identify potential cash flow problems. The cash budget indicated that the company would need additional cash during the third quarter of approximately $2,000,000. The company's board of directors had previously established a target capital structure of 50% debt and 50% equity and the projected 2012 ending balance sheet indicates the company will be very close to the target. Cape Chemicals' primary bank also incorporated the target capital structure into its loan covenants. Loan covenants require a quarterly compliance report. Increasing the firm's bank debt, even for a short period of time, is not an option Ford wants to consider. Other alternatives for covering the projected cash shortfall must be evaluated.

INSTRUCTORS' NOTE

CASE OVERVIEW

Cape Chemical is a regional distributor of liquid and dry chemicals, headquartered in Cape Girardeau, Missouri. The company, founded by Ann Stewart, has been serving southeast Missouri, southern Illinois, northeast Arkansas, western Kentucky and northwest Tennessee for over a decade and has a reputation as a reliable supplier of industrial chemicals. Growth has been steady with sales and profits have been growing. The sales growth has required the acquisition of additional fixed assets and current assets. Financing the additional assets placed a strain on the firm's ability to raise capital. There were many occasions during the prior year that it was necessary to obtain short-term bank loans in order to keep the company operating. To improve the firm's ability to manage its cash flow, Kathy Ford, the company's chief financial officer, directed David Bush, the firm's budget analyst, to also develop a monthly cash budget.

The cash budget indicated that the company would need additional cash (additional financing) during the third quarter (July, August and September) of approximately $2,000,000.

Ford reviewed the cash budget with Stewart. The company's board of directors had previously established a target capital structure of 50% debt and 50% equity and the projected 2012 ending balance sheet indicates the company will be very close to the target. Cape Chemical's primary bank also incorporated the target capital structure into its loan covenants. Loan covenants require quarterly compliance report. Ford and Stewart are reluctant to increase the firm's bank borrowing even for a short period of time. Alternatives considered were:

1) Reduce inventory levels.

2) Collect accounts receivables faster.

3) Delay capital expenditures scheduled for the first half of the year to the second half. …

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