I’m working on a business discussion question and need support to help me study.
I will be needing my initial discussion post and two responses done on classmates.
Say that you are analyzing the financial records of the business you have been thinking about buying. You discover that, although the firm has excellent current and quick asset ratios by industry standards (current assets are higher than current liabilities), its cash is low, and it hasn’t paid its bills on time. How would this influence your decision? List five steps you would take, including three questions you would ask the owner.
Appendix A and Appendix B; and Chapter 3: The Harvard Business Review Entrepreneur’s Handbook: Everything You Need to Launch and Grow Your New Business https://ezproxy.snhu.edu/login?url=https://search…
To complete this assignment, review the Discussion Rubric document.
Here is the 1st classmate response needed.
Errika Pollison posted May 18, 2021 11:51 AM
Being that the company was in perfect condition and above average as a whole, this company covered all of their bases and only cash levels are considered low. This can definitely cause problems with liquidity which will cause more problems long term for the business. I would definitely reconsider buying the company and do some more digging into the company itself.
The five steps that should be taken are:
Speaking with the former business owner about how low the cash levels are and ask why. Also, to inquire about the accounts receivable of the company.
Analyzing the cash flow in this company and compare it to the outstanding sales.
Checking inventory and comparing it to cash to see how much is spent on inventory
Asking the owner why the bills aren’t paid on time and if there is some short term problems that aren’t spoken about.
Lastly, the owner would have to answer how these issues will not come up in the future.
Here is my 2nd classmate response needed.
Whitney Kavanaugh posted May 19, 2021 11:13 AM
Any business can look financially brilliant or epically disastrous on paper. The problem with financial statements in and of themselves, they do not tell the whole story. Ultimately, you need to have a complete understanding of how the business operates on a day-to-day basis. The numbers can only offer a path to more questions.
Low cash flow could mean a multitude of things. The immediate thought is to look at owner’s equity. If this number is high, it could indicate the owner(s) are taking too much cash out of the business. Then look at the liabilities. What exactly are they? Note payable loans for building, equipment, etc.? Credit cards or other lines of credit? Credit cards are notorious for high interest rates. If a small business is charging expenses and not paying off the statement every month, that interest continues to accumulate, making it a nightmare to pay off. Just like in your personal life.
Next, I would look at collection on accounts receivable. Obviously, it is hard to pay bills when you do not have money coming in. Then I would look at the overhead costs. Salaries and labor is one the largest expenses to any business. Are these inline or at the very least reasonable to local and industry averages? If they are higher, why? Is the business renting office/warehouse space? Is that monthly amount inline with local/industry averages? If they are higher, then it could be time to discuss moving to a location that is more affordable but still offers what the business needs to operate. If the company has service contracts with third parties, are those inline with local and industry averages?
Lastly, I would look at what makes up the income. The big question here is, are you charging enough for your products/services to cover all expenses and make a profit? Do you know what your competitors charge? Where are you in relation to them? Raising prices is not always the answer, especially, if you are already in a tight market or industry. Is there opportunity for additional revenue streams within what you are already doing, why or why not? Depending upon the answers to the above, the risk of purchasing the business may or may not be worth the reward.