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L M Fabricating, a partnership business which fabricates steel products for the agriculture sector, was doing a five-year business review for business planning and budget
L M Fabricating, a partnership business which fabricates steel products for the agriculture sector, was doing a five-year business review for business planning and budget preparation of their next 3 years. Their sales have grown steadily over the past 5 years, from 5 million per year to 30 million in their most recent year. They have found that their cash flow has hindered their growth and has cost them profit by having to constantly borrow and pay interest to finance the business. Looking at their financial statements they have recorded the following information to see what they can do to improve and look for steps to help them move forward successfully. Sales: Year 1 5m Year 2 8m Year 3 15m Year4 25m Year 5 30m Year 5 Accounts receivable turnover 28 Year 4 Accounts receivable turnover 18 Year 3 Accounts receivable turnover 10 Days Sales in Inventory 120 Days Sales in Inventory 100 Days Sales in Inventory 60 L and M have each invested $100,000 of their personal money to start and grow the business. The business shows a taxable income of 10 % of gross sales. They have a partnership agreement that provides for a salary allowance of $150,000 each and a 3% interest allowance on their initial investments. The business has an operating loan with TD Bank of $25,000 and long-term loans of $400,000 at 8% to finance machinery and equipment used in the business. In order to continue to expand the business, L & M must improve the quality of their machines and look at replacing aging equipment, but they are uncertain as to how to accomplish this. They are also looking at signing a lucrative contract to export their products to new customers in Africa, something they have never done before. They are uncertain as to the new risks that come with this type of expansion. They have reached out to their auditors for advice both on the financing aspects of their business and on the potential growth opportunity. You are in the consulting department of their auditing firm and have been assigned to provide them with a report. Your report should cover cash flows, finances and risk analysis using the materials covered in this course as the basis of your analysis.
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