Business Studies: Rapid Expansion Efforts Driving Cash Flow Problems - Term Paper Example

Business Studies: Rapid Expansion Efforts Driving Cash Flow Problems BY YOU ACADEMIC ORGANISATION Introduction A situation has occurred in which a hypothetical company that manufactures yoghurt and fruit drinks has rapidly expanded its business. During the course of this hasty growth, the firm is now experiencing a noticeable cash flow problem. This paper will identify the factors which could have potentially caused the cash flow issues and will offer theoretical conclusions as to how this problem might have occurred, as well as identify contemporary business efforts by which to improve the firms cash position. For the sake of this work, this hypothetical company will be referred to as United Health Foods. Factors Causing Cash Flow Issues Cash flow is best defined as the position within a firm which identifies the cash receipts and disbursements (expenditures) of the company (Marshall et al, 2004). A positive cash flow represents a situation in which a firm is competently able to pay its creditors while still maintaining an adequate supply of available operating cash. A negative cash flow indicates the opposite, where a firms creditor-related expenses outweigh its available cash. Having offered this definition, the hypothetical United Health Foods is experiencing a cash flow crisis due to its rapid expansion efforts. Effectively managing cash flows is crucial to the success of a business, thus a business owner must "understand the sources and uses of the firms cash" (Longenecker et al, 2006: 213). In the case of United Health Foods, its sudden rise in operational costs associated with expansion has caused the company to experience a situation where its expenditures have outweighed its revenue (cash intake). When a business expands too quickly, without taking into consideration the sources of income, cash flow crises usually occur. In the case of United Health Foods, the problem is likely in its expansion-associated operating costs, which are the costs associated in operating a business, including utilities, rents, and payroll salaries (Nickels et al, 2006). Assume for a moment that a portion of Uniteds growth plan included the establishment of various, additional manufacturing facilities providing yoghurt and fruit drinks to various markets. Operating expenses, logically, will continue to increase with the establishment of each new facility. This creates a situation in which United must pay out substantial start-up costs for the new operations, perhaps payments for a new distribution centre, along with various operational costs for labour and supply (raw materials). Additional requirements for fresh fruit associated with yoghurt and drink production are likely to have been incurred by United, as well as license fees, necessary permits, and insurances; as several relevant examples. While the firm waits for a higher return on its expansion investments, expenses increase while revenues from the sale of its expanded products do not immediately increase. In this situation, United has implemented a growth strategy without analyzing its current cash flow situation, creating the situation where available cash is drained by excessive operations-related payouts. The largest failure of senior leadership within United Health Foods was in its creation of its strategic objectives, decisions with long-term perspective which affect the entire organisation (Gomez-Mejia et al, 2005). Strategic initiatives which involve rapid growth in an industry require an understanding of the methods available for a firm to secure additional income prior to allocating cash for expansionary business objectives. United Health Foods did not secure additional revenues, therefore it is experiencing this budget crisis. Another relevant scenario with this yoghurt and fruit drink manufacturer pointing toward its cash flow crisis is a poor design of its marketing programme. Perhaps United would have been better served with a more competent promotional plan, involving the "process of informing, persuading, and influencing a consumers purchase decision" (Boone & Kurtz, 2006: 51). A marketing strategy is designed around the strategic goals of the business and requires a rather proactive view of the business current financial position. In the case of United, since it is experiencing diminished cash resources, the company, likely, did not examine the potential gains from a sound marketing and promotional strategy designed to secure rapid sales volumes by the yoghurt and fruit drink consumption by its customers. Had United established an aggressive marketing campaign prior to establishing additional manufacturing/distribution facilities, the firm would have likely experienced a more rapid increase in its foods sales, allowing the firm a higher ratio of operating income by which to launch its strategic growth plans. Finally, assuming for a moment that United Health Foods expansion efforts included the establishment of a global growth initiative, involving foreign markets, the heavy costs associated with long-distance distribution could likely be a legitimate reason for the firms cash flow issues. For instance, the firm should have considered the costs associated with tariffs, international taxes, or even payouts involving air and sea distribution. These expenses, logically, would erode Uniteds available cash faster than the receipt of the sales dollars from international markets. Solutions for Uniteds Cash Dilemma Outside of the creation of a well-developed marketing strategy, there are several additional options available to the company to correct or improve its immediate cash flow crisis. The first solution is for United Health Foods to consider terminating the operations of some of its under-performing business units, either domestic or overseas. Assuming that the firms cash flow crisis is due largely to the rising costs of operating the remote facilities, the firm might wish to slow the progress of its growth until another time in the future when the firm is in better financial position. Manufacturing divisions which are not highly profitable to the firm could be dismantled, which would create a situation where the firm experiences less labour costs and much fewer operational expenses. Many of these expenses would be considered fixed costs, or expenses that are able to be accurately forecasted each quarter (Marshall et al, 2007). These fixed costs would include the property taxes, rents, or high-dollar insurance premiums for liability and general insurance. Further, United Health Foods might consider offering its customers immediate incentives, which are short-term enticements to coerce a target market to move immediately toward a product purchase (Siegel, 2006). In the case of United, incentives might include special promotional sales on its fruit and yoghurt brands, such as buy one, get one free promotions or cents off incentives. In addition, the firm could consider a contest incentive, offering customers a chance to win any given cash amount. A contest promotion which increases chances to win through the purchase of excess fruit drink and yoghurt products would create a higher, immediate sales volume, therefore offsetting the expenses associated with increased operational costs. United Health Foods, depending on the immediacy of the problem with cash flow, could also consider securing a business loan for a reasonable amount in order to sustain the business short-term. Though this would create a long-term expense, in terms of loan repayment, it would create a situation where the available cash reserves immediately increase. These cash reserves could ensure that United is able to pay all of its operational costs while it waits for a significant return on investment stemming from its newly established manufacturing facilities. Another notable effort which United could undertake is an analysis of its current assets, determining whether a portion of these assets can be sold to raise available cash. The appropriate assets for a business of this type could include manufacturing machinery or accumulated investment properties. Finding an immediate buyer for these assets could help United to increase its cash flows. A more extraordinary effort for United to consider is the issuance of corporate bonds, a certificate which indicates that the buyer has lent money to a firm (Nickels et al). Though a bond serves to increase long-term debt, due to the legal requirements to repay the buyer with interest, it can substantially increase available cash when they are issued by the company. A similar tactic would involve United Health Foods to issue common stock in the company, enticing investors to share in the ownership of the firm. Once the stock has been purchased by the public, the firm can use these funds to immediately invest it back into the operations of the business. Issuing stock creates no additional debt, which makes this a rather favourable method of increasing cash flow. Conclusion Whatever the issues might be which are affecting the positive cash flow of the hypothetical United Health Foods, it is clear that the firm requires a stronger leadership team equipped with the knowledge necessary to accurately forecast both long-term and short-term business decisions. Rapid expansion without an accurate assessment of its current financial position is a proverbial recipe for disaster. United, as a future financial goal, might consider creating regular contingency plans in the event that a strategic business decision does not return the desired outcome. Taking steps to secure United Health Foods yoghurt and fruit drinks business involves a keen understanding of the sales and marketing environment as well as competent monitoring of the firms expenses versus revenues. Rapid expansion without the available cash to sustain the business decision could likely lead to a bankrupt industry, therefore ongoing cash flow analyses would be the most logical course of action for any future activities from United Health Foods. Bibliography Boone, Louis E. & Kurtz, David L. (2006). Contemporary Marketing. 12th ed. Thomson South Western. United Kingdom: 51. Gomez-Mejia, Luis R., Balkin, David B. & Cardy, Robert L. (2005). Management: People, Performance, Change. 2nd ed. McGraw Hill Irwin. London: 244. Longenecker, J., Moore, C., Petty J. & Palich, L. (2006). Small Business Management: An Entrepreneurial Emphasis. 13th ed. Thomson South Western. United Kingdom: 213. Marshall, David H., McManus, Wayne W. & Viele, Daniel F. (2004). Accounting: What the Numbers Mean. 6th ed. McGraw Hill Irwin. London: 582. Marshall, David H., McManus, Wayne W. & Viele, Daniel F. (2007). Accounting: What the Numbers Mean. 7th ed. McGraw Hill Irwin. London: 447. Nickels, William G., McHugh, James M. & McHugh, Susan M. (2006). Understanding Business. 7th ed. McGraw Hill Irwin. London: 562. Siegel, Carolyn F. (2006). Internet Marketing: Foundations and Applications. 2nd ed. Houghton Mifflin Company: 305. Read More