Genesis operations management team is now preparing to implement operating expansion plan. Previously, the firm’s cash position did not pose a challenge. Though, the planned foreign expansion requires Genesis to have a reliable source of funds for both short-term and long-term needs.
One of Genesis’s potential lenders tells team that in order to be considered as the viable customer, Genesis should prepare and submit a monthly cash budget for the present year and a quarterly budget for subsequent year. The lender would review cash budget and determine whether or not Genesis could meet loan repayment terms. Genesis’s ability to repay loan depends not only on sales and expenses but also on how quickly company could collect payment from customers and how well it manages its supplier terms and other operating expenses. The Genesis team members agreed that being fully prepared with factual data will allow them to maximize their position as well as negotiate favorable financing terms.
The Genesis management team held the brainstorming session to chart the plan of action, which is detailed here.
• Estimate historical data and prepare assumptions that would drive planning process.
• Produce a detailed cash budget which summarizes cash inflow, outflow, and financing needs.
• Identify and compare interest rates, both short-term and long-term, using debt and equity.
• Analyze the financing mix (short/long) and cost associated with the recommendation.
• As this expansion is critical to Genesis Corporation expanding into new overseas markets, operations management team has been asked to prepare the executive summary with supporting details for Genesis’s senior executives.
• Working over the weekend, management team developed realistic assumptions to construct a working capital budget.
• Sales: The marketing expert and the newly created customer service personnel developed sales projections based on historical data and forecast research.
• Other cash receipt: Rental income $15,000 per month
• Production material: The production manager forecasted material cost based on cost quotes from reliable vendors, the average of which is 50 percent of sales.
• Other production cost: Based on historical cost data, this cost on an average is 30 percent of the material cost and occurs in the month after material purchase.
• Selling and marketing expense: Five percent of sales
• General and administrative expense: Twenty percent of sales
• Interest payments: $75, 000—Payable in December
• Tax payments: $15,000—Quarterly due on 15th of April, July, October, and January
• Minimum cash balance desired: $ 25,000 per month
• Cash balance start of month (December): $15,000
• Available short-term annual interest rate is 8 percent, long-term debt rate is 9 percent, and long-term equity is 10 percent.
• Dividend payment: None
Based on this information, perform the following:
1) Using Cash Budget spreadsheet, find out detailed company cash budgets for forthcoming and subsequent years. Summarize sources and uses of cash, and identify the external financing needs for both forthcoming and subsequent years.
2) Download this Excel spreadsheet to view company’s cash budget. You would find out the company’s monthly cash budget for forthcoming year and quarterly budget for the subsequent year using this information.
3) In the executive-level report, summarize company's financing needs for forecast period and provide your recommendations for financing the planned activities. Make sure to comment on the following:
4) Your recommended financing solution and cost to the firm: If Genesis needs operating cash, how must it fund this need? Are there internal policy changes with regard to collections or payables management you would recommend? What types of external financing are available?
5) Your concerns associated with firm's cash budget. Is this a sign of weak sales performance or poor cost control? Why or why not?
prepare a 7-page paper in Word format. Apply APA standards to citation of sources.
Genesis Corporation develops highly technical software and hardware applications for high-end commercial and military use. Genesis is considering expanding its production operations to lower cost locations outside the United States. The company currently has facilities in Canada but realizes the need for further expansion in order to respond timely to global customers.
Two technology students founded Genesis Corporation in 2000 as the small technology lab in North Carolina. The company grew rapidly, and by 2004, revenue growth exceeded all expectations as an expanding client base prompted an operating expansion. Genesis opened its first non-US operating facility in Canada during last quarter of 2004, followed by another facility in Canada in early 2005.
Financing for this expansion came from two sources: family seed monies and the equity investment by the small group of venture capitalists. Rapid revenue growth, operating expansion, new international clients, and involvement of more professional ownership necessitated an expansion of the management team. Expanded management team, that now oversees domestic and international operating facilities, consists of the general operations manager, an accountant, a software application expert, a marketing manager, a production manager, and a customer service manager. All of these individuals with exception of the production manager were outside hires.
Opportunity and Dilemma
An intensive strategy planning session with founders and new owners resulted in the five-year strategic plan which calls for aggressive expansion. The group feels that Genesis has unique technology which would be very attractive to governments and large manufacturers in developed world and selected emerging economies, but company should move quickly to take advantage of these opportunities.
The recently developed operations management team is charged with optimizing all operations and expanding company’s sales to emerging markets in Europe and Asia. This expansion of sales and operations would need important amounts of capital to invest in new production facilities and resources, sales staff, and marketing activities. Genesis hopes to avoid having to find more equity investment to fund this expansion, but it is not clear if enough funds could be generated internally from sales and profits, and obtaining a bank loan could be very challenging for small, young companies.