Question

The income statement, balance sheet, and statement of cash flows are the three main financial statements that every business uses and are essential for a manager to review on a monthly basis. If the financials that you were analyzing showed a profit of $200,000, cash deficit of $400,000, and debt of $800,000, then what strategies would you put in place to maintain profit, increase cash flow, and decrease debt?

Answer 1

Since the company is profitable (it earned a profit of $200,000) it can increase its cash flow by better managing its current assets and current liabilities. The company needs to review its inventories and determine inventory turnover of each different item of inventory. This will help it to reduce its inventory quantities and so cash will be freed up. Inventory items that have not turned for a long period should be reduced to free cash. Secondly the company can improve its cash flows by monitoring its accounts receivable and ensuring that customers are adhering to the credit terms. Similarly accounts payables should also be monitored to ensure that the company is making the best use of credit terms being offered to it. The company can also improve its cash flow by revaluating its operating expenses and cutting out any unnecessary expenses.

In order to decrease debt the company should look at financing its future growth through other means. As the company is profitable it can plough back a portion of its profits for this purpose. Capital expenditures can be paid through retained earnings. Using this strategy will remove the requirement for using debt and hence the debt levels of the company will go down in a gradual and consistent basis.