Heling Hand Case
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Helping Hand
Case Study
11/9/2012
Introduction
In the case presented below we introduce you with the Helping Hand -company owned by Stafford family, attempt to analyze various ratios, financial indicators and statements and provide you with additional points of view.
Sharon Vincent , the current manager of Helping Hand has being questioned by the present owner Justin Stafford and his consultants about current position of the firm. He has been asked to bring low ROE at least up to industry standards and minimize firms use of debt and In addition firms ability of repaying the loans has been questioned. Vincent was recommended to 1. retire all long-term debt 2. increase firms liquidity position. Stafford was unexpectedly asked to contribute capital back in 1995 and this made him think that firm may be “chewing up cash unnecessarily”. Vincent desires to develop a forecast for the coming year to see if external funds are needed and analyze situational problems. She comes up with various solutions towards credit terms, inventory control, credit needs and etc. but even though she thinks Staffords suggestions are worth of considering Vincents point of view is different towards many aspects. As we learn from the case, Stafford lacks in the competence and our job is to provide analysis along with Vincent.
a) Lets suppose that the company increased its liquidity position by increasing cash balance on its balance sheet. It means that the company has more current asset, as a cash is liquid asset for the company. So
Current ratio= current asset/ current liability
In the 1995 the companys current asset was 6745.9 and its current laib. 1990.8. Current ratio was 3.38 after increasing cash balance, the ratio was 3.6
There is no changes in current liability, it means that current ratio of the company will increase the same is about quick ratio,
Quick ratio=( current asset- inventory)/ Current liability
Current asset=6745.9and inventory 5518.5, current liability 1990.8 quick ratio=(6745.9-5518.5)/1990.8=0.62 after changes in cash balance ratio equals to 0.82
So, if the current assets are increased by increasing cash balance, it means that the difference between current asset and inventory will be higher, and quick ratio will increase respectively.
b) Helping hand increase its liquidity position. It has some advantages but there might be disadvantage also. First of all when the liquidity position is increased, it means that the company can more easily cover its current liabilities. If the liquidity coefficient is more than 1, the company has more current asset. Liquidity can provide risk aversion during crisis, as liquid assets are easier to get rid of. However as I mentioned, the disadvantage might be too high coefficient of liquidity. When the coefficient is too high it means that the company doesnt use its cash and other current asset to make more profit.
The basic reason why companies need additional funds might be an expansion , opening new branches or offices. In this case, they were not planning to expand. The basic reason why cash might be needed is that the company was not leveraged, and it was needed to increase its liquidity by raising cash balance up to a industry norm.
3. a) Profit does not equal cash flow. A company can be profitable and still go bankrupt from cash flow problems. If they must pay for materials in January but dont get paid by their customers until June, they need a loan to survive until June. If they dont get that loan–even if they have guaranteed sales in June–then they will go out of business. Sometimes customers themselves will pay in advance, effectively giving an interest-free loan to a company to help cover cash flow.
A company can have great cash flow, but not be profitable. Amazon.com raised so much money by selling stock in the mid-1990s, that they had $2,000,000,000 in the bank. Every year, they spent more money than they made, so their yearly profit was negative. But because they had so much money saved up, they could afford to make up the difference out of their bank account. The big stock market cash inflows made up for the continual losses. Only after a decade did Amazon actually start making a profit as a company, so they now have good cash flow and are profitable.
To sum up, profit is how much money you have left after you get your revenue and pay your expenses. Cash flow is when you actually get and pay the cash. In the long-term, you must eventually get profitable or find someone like stock investors to keep giving you cash to make up for your losses. In the short-term, even if youre profitable, you survive or fail based on whether you have cash to pay the bills. Thats why they say Cash Flow is King.
c) Cash Flow / Net Sales: how many dollars of cash we get for every dollar of sales.
In addition to capital expenditures, dividends are included in order to subtract it from net operating cash flow to get to get a more comprehensive sense of free cash flow. This could then be compared to sales as was shown above.
In general, the market considers dividend payments to be in the same category as capital expenditures – as necessary cash outlays. But the important thing here is looking for stable levels. This shows not only the companys ability to generate cash flow but it also signals that the company should be able to continue funding its operations.
d) First of all, Stafford was asked to contribute $407,000 to company because of the lack of sufficient self-funding resources. In addition, to accomplish not just running the company, but paying its bills and retiring long-term debts as quickly as possible, external funds rise is needed.
Second, Growing business owners tend to be very ambitious about growth and liquidity. Recognizing the necessity to develop and grow rapidly, and the resulting need to raise large amounts of outside capital, technology entrepreneurs are faced with a range of options, each appropriate to a different stage of growth. Early in the companys development wealthy individuals and founders can provide the relatively modest amounts of capital (less than $1 million) to get the business plan written, the core management team assembled, and a prototype developed.