Internal Memo on Short-term and Long-term Capital Position and Needs of a Company

Executive Summary

This report analyzes the company's financial situation focusing on working capital management, cash conversion cycle, and funding growth. The report provides recommendations for the upcoming fiscal year and evaluates options for reducing the additional funds needed (AFN). The report also examines the potential financial benefits of exchanging U.S. dollars for Japanese Yen and Israel shekels.

Findings and Recommendations

The company's financial analysis shows it requires an AFN of $446,000 for the upcoming financial year. To reduce the AFN, the company may seek several strategies, including reduction of expenses, improvement of the collection of accounts receivable, increment of the inventory turnover rate, and exploration of opportunities in Israel for expansion which will increase sales and promote cash flow.

Working capital is very critical to the financial strength of a company. The gross working capital is the total current assets of the company, the net working capital is the difference between the current assets and current liabilities, and the net operating working capital is the difference between the operating assets and operating liabilities. The cash conversion cycle (CCC) measures the time it takes to convert inventory into cash. Assuming a new venture requires an additional $50,000 monthly in inventory from a supplier over the next year, the company's CCC is 51 days, and the turnover ratio is 7.60. The investment in accounts receivable is $197,782.41, and the cost of goods sold is 75% of sales. The company's sales are expected to increase from $5 million in 2020 to $6 million in 2021, or by 20%. Its assets totaled $3 million at the end of the prior fiscal year, and current liabilities were $1 million, consisting of $250,000 of accounts payable, $500,000 of notes payable, and $250,000 of accrued liabilities.

Regarding the options available for exchanging U.S. dollars for Japanese yen and Israel shekel, the company can exchange U.S. dollars for Japanese yen first, then convert them to Israel shekels or directly to U.S. dollars for Israel shekels. Cross exchanging between the yen and the shekel s 30.45 Yen/Shekel. When deciding the most advantageous option, the company should consider the exchange rates and transaction costs of every option. Note that the potential financial advantages of every option depend on the exchange rates at the time of the transaction.

Recommendation

To improve working capital management, the company may evaluate implementing effective measures to reduce inventory levels and reduce the CCC. The Just-in-time (JIT) inventory management strategy delivers both. Promoting the collection of accounts receivable and negotiating better payment terms with suppliers reduces the investment in accounts receivable and improves cash flow. Based on the calculations and information given, it is recommended that the company directly exchange U.S. dollars for Israeli shekels to invest in Israel. This option eliminates the need for a second transaction, reducing transaction costs and potential exchange rate-related risks. It is of absolute importance that the company monitors the exchange rates and transaction costs before moving in to transact.

Conclusion

The company should focus on working capital management and explore opportunities for growth to reduce the AFN. The company can improve its cash flow and reduce CCC by implementing measures to reduce inventory levels, improve accounts receivables, and negotiate better payment terms with suppliers. Finally, the company should consider the exchange rates and transaction costs when exchanging U.S. dollars for foreign currency.

Provide the company owner with a executive summary of your findings and recommendations. Address the following in your executive summary:

• Briefly identify the purpose of your report.
• Concisely summarize the results of your financial analysis of the company's short- and long-term capital budget needs.
• Synthesize your recommendations for how the company can raise money in the short-term and long-term to continue to add value to the organization.