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Breeze House - Case Study Example

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Breeze House

As a business, the accounts receivables are one the company's sources of cash. Accounts receivable is like cash in the bank. It shows up as an asset on the balance sheet because it means value in the business. (Muckain, 1998)
When looking at the budgeted profit and loss statement of the company (see Table 1), the net income of the company is not stable. This means that revenues and expenses that are incurred for the month are actually revenues and expenses that should have been incurred on a different month. As mentioned, this situation happens because of the long turnover of accounts receivable while the accounts payable are settled within the month. However, the practice of the company of maintaining inventory stocks with a lead time of half of the next month's demand is commendable, since it is enough to satisfy the demand of the market while preventing over-stocking or under-stocking of inventory.
Effective credit control is one way of improving the cash flow of the company. A good credit control system increases sales, reduces bad debts and increases profits. The credit control can also increase the creditworthiness of the company and build confidence in the banks. An effective control system focuses on the accounts receivable of the company. (Brealey, Myers, & Marcus, 2001)
It is a practice of companies to allow a d...
120,000
172,500
COGS
63,750
83,438
169,688
187,500





Gross Profit
46,250
76,563
87,813
132,500





Labour costs
5,500
8,000
24,875
16,000
Expenses
6,000
8,000
12,000
16,000
Total Expenses
11,500
16,000
36,875
32,000





EBIT
34,750
60,563
50,938
100,500
Interests
7,500
7,500
7,500
7,500
Taxable Income
27,250
53,063
43,438
93,000
Tax
8,175
15,919
13,031
27,900
Net Income
26,575
44,644
37,906
72,600



Breeze House Current Financial Performance Report
Breeze House's current financial situation is critical. The company needs to incur a debt of 50,000 in order to have a better cash flow that would be needed for the company's operating activities. As reflected on the cash flow (see Table 2), the net cash used for operating activities is negative. This is caused by the two factors. First, the revenues generated by the company through its sales will only be accounted after two months of service completion. Second, the accounts receivables of the company is out of control with 10% of sales incurred as bad debts and almost 74% of the outstanding debts have been due for 90 days or more. As a business, the accounts receivables are one the company's sources of cash. Accounts receivable is like cash in the bank. It shows up as an asset on the balance ...Show more

Summary

Breeze House's current financial situation is critical. The company needs to incur a debt of 50,000 in order to have a better cash flow that would be needed for the company's operating activities. As reflected on the cash flow (see Table 2), the net cash used for operating activities is negative…
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