Genesis Energy Cash
Position Analysis
The Genesis Energy operations
management team is now preparing to implement the operating expansion plan.
Previously, the firm’s cash position did not pose a challenge. However, the
planned foreign expansion requires Genesis Energy to have a reliable source of
funds for both short-term and long-term needs.
One of Genesis Energy’s potential
lenders tells the team that in order to be considered as a viable customer,
Genesis Energy must prepare and submit a monthly cash budget for the current
year and a monthly cash budget for the subsequent year. The lender will review
the cash budget and determine whether or not Genesis Energy can meet the loan
repayment terms. Genesis Energy’s ability to repay the loan depends not only on
sales and expenses but also on how quickly the company can collect payment from
customers and how well it manages its supplier terms and other operating
expenses. The Genesis Energy team members agreed that being fully prepared with
factual data would allow them to maximize their position as well as negotiate
favorable financing terms.
The Genesis Energy management
team held a brainstorming session to chart a plan of action, which is detailed
here.
·
Evaluate historical data and prepare assumptions that will drive
the planning process.
·
Produce a detailed 2 year cash budget that 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 the cost associated
with the recommendation.
Since this expansion is critical
to Genesis Energy expanding into new overseas markets, the operations
management team has been asked to prepare an executive summary with supporting
details for Genesis Energy’s senior executives.
Working over a weekend, the
management team developed realistic assumptions to construct a working capital
budget.
1.
Sales: The marketing expert and the newly created customer
service personnel developed sales projections based on historical data and
forecast research. Please use the sales projections provided in the template.
See “Download” in item 1 below.
2.
Other cash receipt: Rental income $15,000 per month for Y1 and
20,000 for Y2.
3.
Production material: The production manager forecasted material
cost based on cost quotes from reliable vendors, the average of which is 45
percent of sales
4.
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
5.
Selling and marketing expense: Six percent of sales
6.
General and administrative expense: 18 percent of sales
7.
Interest payments: $10,000—Payable in December Y1 and $0 payable
in December Y2.
8.
Tax payments: $15,000—Quarterly due on 1st of April, July,
October, and January
9.
Minimum cash balance desired: $25,000 per month
10.
Cash balance start of month (December): $10,000
11.
Available short-term annual interest rate is 8 percent,
long-term debt rate is 9 percent, and long-term equity is 10 percent. All funds
would be available the first month when the firm encounters a deficit
12.
Dividend payment: None
Based on this information, do the
following:
1.
Using the Cash Budget spreadsheet,
calculate detailed company cash budgets for the forthcoming and subsequent
year. Summarize the sources and uses of cash, and identify the external
financing needs for both the forthcoming and subsequent years.
Downloadthis Excel spreadsheet to view the
company’s cash budget. You will calculate the company’s monthly cash budget for
the forthcoming year and quarterly budget for the subsequent year using this
information.
2.
In an executive-level report, summarize the company’s financing
needs for the forecast period and provide your recommendations for financing
the planned activities. Be sure to comment on the following:
a.
Your recommended financing solution and cost to the firm: If
Genesis Energy needs operating cash, how should 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?
b.
Your concerns associated with the firm’s cash budget. Is this a
sign of weak sales performance or poor cost control? Why or why not?
Write a 7-page paper in Word
format. Apply APA standards to citation of sources. Use the following file
naming convention: LastnameFirstInitial_M3_A2.doc.
