Medieval Adventure Company
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Case 11-1 Medieval Adventures Company
If we look at the Balance Sheet for April, we see that Medieval Adventures Company goes into negative cash on this month. July is the last month of negative cash flow. Cash bottoms out at $(40,000), so this is the amount of funds they will need to raise. If they decide to get a short-term loan for the $40,000, they will be able to repay it in October. A line of credit may be better suited for this situation. They can draw the money as needed and only pay interest on the portion drawn upon.
Even though they were profitable in a very short period of time, monthly increases in account receivable ($55,000/month) and inventory ($17,500/month) were burning through cash faster than they were able to recover it from customers. All this could have been avoided if they created a yearly Profit Plan at the beginning of the year. Part of the plan would have been a cash budget which would show them that the way they had things setup would leave them without cash by April. With the information from the cash budget they could have done a few things.
They could have setup a line of credit if they wanted to