Snowboard Financial Analysis

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Custom Snowboards is considering borrowing a 5 year loan (long term loan) from a bank. It has been deemed necessary that the company presents a detailed analysis of its financial statements to reveal their credit worthiness so as to qualify for the loan. This report logically presents the analysis to this effect. The financial statements have several line items that could either support or discredit the company’s chances of being considered for the loan. These items/points are categorized into strengths (supportive) and weaknesses (non-supportive)
Strengths in the financial statements
Cash and cash equivalents (C &CE)
C & CE’s have been increasing with time. In year 12, they amounted to 121,000 and the figure increased substantially to read
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The profitability of Custom Snowboard Company is on the decrease. Even though this may not have a direct effect on the cash flow of the company, it poses questions on the long term sustainability of company operations.
Decrease in short term investments
Reducing short term investments will have a negative effect on the cash flow of the company. This is because, the funds that used to be paid to and received from such investments will no longer form part of the cash flow streams. Such investments are very important in boosting the working capital of the business.
Increase in furniture and fittings
Furniture and fittings are part of fixed assets and their increase has a negative impact on the liquidity of the company. They are seen to have increased from $300,000 in the first year to $500,000 in the last year. This means that money is now tied up where it would be hard to get it back and it works against the credit worthiness of Custom Snowboards Company.
A2: Risks – Mitigation of financial risks
The company is faced with risks which need to be mitigated in order to boost the chances of the company being accorded higher loans. Below is a breakdown of how the Custom Snowboard Company needs to manage these
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Such funds are difficult to recoup and so the business should make such purchases only when it is necessary. Any other form of capital investment decision should be made in consultation with the right personnel who can deduce the financial implication of such moves.
More equity and less leverage: A highly leveraged company carries with it high risks. Custom Snowboard Company should strive to make sure that its capital structure is more constituted of equity than it is of debt (Poznanski, Sadownik, & Gannitsos, 2013). The debt ratio should be as low as possible to make sure that the company is optimally leveraged. Banks find it hard to offer good loans to companies which are highly leveraged due to high likelihood of default.
Only enough inventories should be kept: Inventory is known to tie up funds especially when it is not fast moving. The business should establish optimal inventory levels for various products depending on how fast they move. The principle of “Just In Time” would come in handy in this case. JIT is a stock management technique in manufacturing that seeks to eliminate all possible wastage in terms of storage, time and labor (Radisic, 2007). Inventory lowers the acid test ratio which is a measure of liquidity of a
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