CASE ANALYSIS

Case Analysis

Case Analysis

Q1 A) Suggest a trading name for the new company. With reference to the case study, which type of business structure would you recommend and why.

Answer: Trading name that I would recommend for the company based on their offerings is “Phoenix Equipments”. Business should be established as Partnership firm as all associates would be contributing their skills and money. Since business does not need heavy investment and is small size in nature. Therefore, Corporation or Limited Liability Company will not serve the purpose of company.

Q1 B) Explain one disadvantage and one advantage of your recommended structure.

Answer: Partnership provides an advantage over tax as no tax burden is imposed on the financial returns of company. Taxes are adjusted from the profits and losses of individual partner. The biggest disadvantage of partnership is that every partner is personally liable for the business related legal and financial obligations (Brigham, 2008).

Q2 A) Explain using a diagram, the working capital cycle for the business. Answer:Working capital defines the need of excessive current assets compare to current liabilities. It is directly dependant on the average collection period and average collection period of business (Vance, 2002). For the difference in two determines the period for which company would need cash to run its operations. Working capital cycle of business is as follows:



Total time required to receive goods and process it into finish goods is 60 days. After that collection from sales of unit will take additional two months time. However, payment to supplier would have to be made within one month. Therefore, business would require injection of additional working capital for the differential time period of 90days.

Q2 B) Identify any potential liquidity problems that the company could experience.

Answer:Expected financial flow of the company shows that company will experience liquidity crunch once its business operations start. Company has emphasized on leveraging the credit policy to customer twice the time of leverage it is getting from its suppliers. However, delay of approx. 2 months is being observed from ordering of raw material to conversion in finished goods. Average inventory days will therefore delay the sales time by same time. Subsequently, collection of funds time will increase that will make the total collection of funds time of 4 months. If we look at payment pattern of business, company is required to settle its debt and credit loans within one month with suppliers. Therefore, difference of average collection and average payable period shows that company will be in need of excessive cash for three months that will deteriorate its liquidity ratios. It would be highly dependant on short term-borrowings if excessive cash is not maintained in reserve (Vance, 2002).

Q2 C) Suggest ways in which the business could manage their working capital.

Answer:Company should reduce its average collection period by decreasing the credit terms by one month at least. Including, it should focus on decreasing the manufacturing time to reduce average inventory in days' time. This would help release the excessive cash requirement from the ...