question archive Chapter 16 Discussion Katie Murphy is preparing for a meeting with her banker
Chapter 16 Discussion Katie Murphy is preparing for a meeting with her banker
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Chapter 16 Discussion
Katie Murphy is preparing for a meeting with her banker. Her business is finishing its fourth year of operations. In the first year, it had negative cash flows from operations. In the second and third years, cash flows from operations were positive. However, inventory costs rose significantly in year 4, and cash flows from operations will probably be down 25%. Murphy wants to secure a line of credit from her banker as a financing buffer. From experience, she knows the banker will scrutinize operating cash flows for years 1 through 4 and will want a projected number for year 5. Murphy knows that a steady progression upward in operating cash flows for years 1 through 4 will help her case. She decides to use her discretion as owner and considers several business actions that will turn her operating cash flow in year 4 from a decrease to an increase.
Required
- Identify two business actions Murphy might take to improve cash flows from operations.
- Comment on the ethics and possible consequences of Murphy's decision to pursue these actions.
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Two business actions that Murphy might want to take are since the first-year cash flow was negative, and in the 2nd and third-year cash flow was positive, and in the fourth year, inventory significantly rose. First, it's to take control of how much inventory she has and maintain a low budget and reduce the amount of inventory that her business needs until she has the cash flow to keep it secure and second, she could get a new collection of receivables balance then she can reduce the accounts receivable balance; therefore, she can keep her business on the right track.
The financial statements may reflect a business that follows the right protocol, but the way Murphy is thinking of obtaining the loan so it will be considered unethical or even illegal. If I were Murphy when it comes to dealing with a bank as a businesswoman you are in partnership with the bank, she should not take a risk to obtain bank financing, and this may lead to future financial hardship for her business.
