Business finance Essay

(i) Eli Lilly is very excited because gross gross sales for his nursery and plant company be expected to double from $600,000 to $1,200,000 following(a) year. Eli notes that pelf assets (Assets Liabilities) will remain at 50 percent of sales. His home will enjoy an 8 percent return on essence sales. He will start the year with $120,000 in the bank and is crowing about the Jaguar and luxury townhouse he will buy. Does his optimistic wit for his funds position appear to be correct? Compute his potential hard currency balance or deficit for the end of the year. Start with seed cash and subtract the asset buildup (equal to 50 percent of the sales enlarge) and bring in profit. (ii) In problem 1 if there had been no increase in sales and all another(prenominal) facts were the same, what would Elis ending cash balance be? What lesson do the examples in problems 1 and 2 gild?(i) The calculation starts with the beginning cash which is subtracted the asset buildup and then add ed in profit. As to why subtract the asset buildup? This is because the calculation should be working with net assets (assets and liabilities), which is short for assets not financed with debt. Because any asset not financed with debt in naive realism must be funded either with fresh equity or with carry earnings, the total $300,000 increase in assets needs to be supported by an increase in debt (Jensson, 2006).Beginning cash $120,000Asset buildup (300,000) (50%* $1,200,000)Profit 96,000 (8%* $1,200,000) ending cash ($84,000) DeficitTherefore, his optimistic outlook for his cash position is wrong. cash in will be in a deficit.(ii) In problem 1 if there had been no increase in sales and all other facts, the new calculation is shown below.Beginning cash $120,000Asset buildup (0)Profit 48,000 (8%* $600,000) final result cash $168,000 BalanceTherefore, flat though no increase in sales, Eli Lilly would end up with cash balance but not deficit.From the examples in problem 1 and 2, we can learn the lessons that higher sales may not translate into higher cash flow. The more sales obtain, the more financing requirements needed (Dechow et al., 1998). For example, the cash may be used for construction up inventories, which may depreciate in value or even become obsolete if the inventories are not sold in a timely manner. Inventories are valued as assets since they tie up heavy(p) hence they are expected to be sold as briefly as possible so that realizing investment return. The expenses of building up inventories are not recorded until products are actually sold. Inventories become liabilities when life motorbike ends either because of expiry or by becoming discounted/ obsolete (Buzacott & Zhang, 2004).In problem 1 even though the companys sales are expected to double, the assets remain 50% of the increased sales, which leads to significant cash reduction even for a potential profitable firm. In hunting lodge to ensure cash balance, Eli Lilly should try to sell the liquid assets such as inventories as soon as possible. On the other hand, because the sales harbor the same in problem 2, there is no more roof needed to build up assets. All in all, increasing sales not necessarily lead to more cash balance.ReferencesBuzacott, J. A., & Zhang, R. Q. (2004). Inventory focus with asset-based financing. Management Science, 50(9), 1274-1292.Dechow, P. M., Kothari, S. P., & L Watts, R. (1998). The relation between earnings and cash flows. ledger of Accounting and Economics, 25(2), 133-168.Jensson, P. (2006). Profitability Assessment Model. Reykjavk, Iceland.