(Cash management; writing) Jose Martin founded a firm that manufactures innovative toys. Since its founding in 2000, the firm has experienced steady growth. However, in the past six months, the firm’s products were featured on two major network television shows. As a result of that exposure, the demand for the firm’s products jumped dramatically. To meet demand, the firm ramped up production by adding a second shift of workers. With the added production capacity, the firm has been producing at 80 percent above levels of the prior year. One of the surprising side effects of this growth has been a severe cash crunch. Just this morning, Martin obtained the following balance sheet information from his CFO:
|
Current assets |
|
|
Cash |
$ 200,000 |
|
Accounts receivable |
950,000 |
|
Inventory |
3,900,000 |
|
Current liabilities |
|
|
Accounts payable |
$2,900,000 |
|
Wages payable |
900,000 |
|
Taxes payable |
300,000 |
a. Discuss how the high rate of growth has created the cash crunch Martin’s firm is currently experiencing.
b. What strategies would you propose to Martin to deal with the cash shortage?