Cape Chemical Case

Looking at the financial reports that were presented to me by Ann Stewart, the president and primary owner of Cape Chemical, it is clear to see why the company has had trouble creating more cash on hand while the sales have skyrocketed.

At the same time Cape Chemical is being profitable, they are experiencing some major cash flow problems. Like many companies, Cape Chemical, can report a profit but not produce a positive cash flow because both revenues and expenses aren’t clearly cash inflows and outflows. They have obviously been able to have positive sales increases over the last few years with a growth factor well over 50%. However, obtaining assets to help support this sales growth is the major foundation of Cape Chemical's ongoing cash flow problem.

I have made and attached a cash flow statement labeled accordingly with this report. These cash flow reports should be a priority for the company in the future because it is clear to see what cash flow problems are being incurred and to find the cause. This cash flow statement shows what and how cash has been used during the period of 2006 and 2007. The cash for Cape Chemical has been used to finance the large increases in accounts receivable, inventory, and additional fixed assets. This increase in accounts receivable is mainly due to Stewarts’ “soft approach” she takes with collecting outstanding fees. The inventory increases are in excess of what is needed and could be cut back in order to keep more cash on hand for the cash flow issues.

Cash has been generated mainly from increasing accounts payable, short-term and long-term borrowing, depreciation expense, as well as income. Cape Chemical made more than 1.6M from cash income and depreciation between 2006 and 2007. Accounts payable has also increased by over $3.6M in the last 2 years, allowing the company additional financing.

The asset growth is very important in terms of being able to meet the sales growth that has occurred for the company. To keep...