Why is the company short of cash, can they sustain itself and how should they handle the situation?

LPP soon started receiving requests for the kits from all over the country, as word spread about their availability. Even without advertising, LPP was able to sell its full inventory every month. However, the company was becoming financially strained. Nancy and Sue had about $100,000 in savings, and they invested about half that amount initially. They believed that this venture would allow them to make money. However, at the present time, only about $30,000 of the cash remains, and the company is constantly short of cash.





Nancy Ginavan has come to you for advice. She does not understand why the company is having cash flow problems. She and Sue have not even been withdrawing salaries. However, they have rented a local building and have hired two more full-time workers to help them cope with the increasing demand. They do not think they could handle the demand without this additional help.





Nancy is also worried that the cash problems mean that the company may not be able to support itself. She has prepared the cash budget shown on the next page. All seminar customers pay for their products in full at the time of purchase. In addition, several large companies have ordered the kits for use by employees who work in remote sites. They have requested credit terms and have been allowed to pay in the month following the sale. These large purchasers amount to about 25% of the sales at the present time. LPP purchases the materials for the kits about 2 months ahead of time. Nancy and Sue are considering slowing the growth of the company by simply purchasing less materials, which will mean selling fewer kits.





The workers are paid in cash weekly. Nancy and Sue need about $15,000 cash on hand at the beginning of the month to pay for purchases of raw materials. Right now they have been using cash from their savings, but as noted, only $30,000 is right.

Why is the company short of cash, can they sustain itself and how should they handle the situation?
they will have to purchase less, bcz they are buying 2 months aheda and being paid (75% of the time) 2 months later





so buy less, increase margins. basically growth is going to have to be alot slower.





or they can get an overdraft/credit facility from the bank that will sustain them as when they run out of cash