UNIT 1 CFO - Haley Ducote

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Jan 9, 2024

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1 Understanding Cash Flow Statements Haley Ducote Purdue University Global MT480-01 Corporate Finance Professor Sandy McDonald May 29, 2022

2 Understanding Cash Flow Statements Semtell Company Cincinnati, OH 5/25/2022 Karl Richland, CFO Semtell Company Cincinnati, OH Dear Mr. Richland, I understand your concern with the cash flows statements for Semtell Company. You stated that sales are increasing but cash is decreasing. Following the decrease in cash flow, there is an issue with meeting payroll and/or pay vendors within 30 days. One reason that cash could be decreasing is that the company is not receiving payments for the items sold. Another issue could be that there is more money outgoing than there is incoming. Any increases in accounts receivable will decrease cash flow, because the accounts receivable asset shows how much money customers owe to the company, therefore making any increases in accounts receivable results in decreases cash flow. Just as an increase in accounts receivable hurts cash flow, this applies to inventory as well. The increase in inventory shows that Semtell Company has purchased more goods than they have sold. Current assets include accounts receivable and inventories. This would mean an increase or decrease in assets will have the opposite effect on cash flow. Current liabilities include accounts payable, short-term debt, or notes payable. Any increase in liabilities will result in an increase in cash flows, and vice versa. Any increases in accounts payable will have a

3 positive impact on cash flows and decreases will have negative impacts on cash flows. When a company purchases goods on account or credit, they are not using cash. Fundamentals of Corporate Finance written by Parrino, R., et. al. states that the goal of managing working capital is to establish enough cash within a company for the purpose of paying bills, such as suppliers, and investing any spare cash (2017). Managing a company’s working capital improperly can cause a company to go bankrupt, face legal issues, and/or liquidation of assets. Fortunately, there are a few ways Semtell can increase working capital. Semtell can start with managing the company’s inventory in a more efficient way. Too much inventory will place a burden on cash flow, and not enough inventory can result in the loss of sales to customers. Semtell should also review their collections policy to improve account receivables. Invoices should be sent immediately to customers. Creating a process of sending follow-up invoices after no response/payments from customers can also improve account receivables. There should also be a process in place of ways to collect payments from customers after a certain period of time. If the reminder invoices still result in no payment, then the debt should be sent to collections. Delinquent customers should then be placed on a “Do Not Transact” list to prevent future delinquencies in accounts. Meeting payroll and paying vendors should be Semtell’s number one concern and should be efficiently disciplined. By maintaining an established relationship with vendors, the vendors are more willing to give discounts on their products. Semtell can also cut out any unnecessary expenses. Borrowing money on a long-term basis can help to improve working capital, as well as replacing short-term debt with long-term debt. In conclusion, Semtell Company can manage the working capital by managing inventories and accounts receivable more efficiently. The liquidity of the company and the cash can improve drastically and Semtell can meet payroll and pay their suppliers on time. Sincerely, Haley Ducote

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4 References Parrino, R., Kidwell, D. S., Bates, T., & Gillan, S. L. (2017). Fundamentals of Corporate Finance (4th Edition). Wiley Global Education US. https://purdueuniversityglobal.vitalsource.com/books/9781119371434