Read the Background Information about FirstRate Company, below. Then, explain what the companys treasurer should do about the draft versions of the projected financial statements and short-term cash flow forecast (prepared by him) in response to comments made by the companys chief financial officer (CFO) in their meeting. Do not recommend specific treasury management steps, such as selling investment securities, factoring accounts receivable, reducing operating costs, or seeking alternative financing arrangements. (The background information is not sufficient to formulate such steps, nor is there enough time to implement such steps before the CFO meets with FirstRates banks to discuss the financial projections and cash flow forecast). It is most important that you clearly provide the reasons for your recommendations.

Background Information about FirstRate Company For nearly two decades, FirstRate has been the second largest firm in its industry, maintaining market share approaching 25 percent and generating stable, if modest, sales and net income growth. Beginning in 20X1, FirstRate began to experience intensified competition from several recent entrants into its industry, including a well-capitalized firm that expanded into FirstRates industry by exploiting a distribution channel it developed over many years in its original line of business. FirstRate responded to this increased crowding by competing on price. In contrast, under its historical strategy, the company positioned itself based on brand recognition, product leadership, and personalized customer service. Along with its revised pricing strategy, FirstRate liberalized its customer credit and product return policies. In response to the effects of its revised pricing strategy on the companys operating performance, management immediately scaled back the companys product development plans, but was initially slow to critically re-examine its cost structure. FirstRate eventually reduced staff and closed some facilities as it outsourced certain production and fulfillment activities. However, the transitional costs of implementing these changes were significant. In addition, to support its revised pricing strategy, the company expanded its advertising and promotion. While FirstRates new strategy yielded greater-than-historical sales growth for the company, its reported net income suffered, along with its stock price. In response to the effects of these changes on FirstRates financial performance and condition, its lending banks increased the collateral requirements and interest rates on their loans to the company. The CFO of FirstRate Company is preparing for a meeting at one of the banks where the company been a long-time borrower. The companys $40 million working capital line of credit (LOC) will expire shortly. The company currently has $33.5 million in borrowings outstanding under the LOC and this balance will become due and payable in 30 days, unless the bank renews the LOC.

The companys treasurer has just completed projected financial statements and a short-term cash flow forecast for the company. In anticipation of her bank meeting, the CFO met with the treasurer to discuss the financial projection and forecast. The CFO expressed her concern that these will fail to make a favorable impression on the bank. She continued, Our recent results have already brought pressure from all of our banks. Its important that we have the banks in our corner while we implement our revised strategy. The treasurer responded, Ive prepared these [projections and forecasts] using our best case assumptions and estimates. The CFO replied cryptically, Well, sharpen your pencil because these are probably not going to get the job done. As the treasurer left her office, the CFO reminded him that, We have more than a thousand employees, even more stockholders, not to mention dozens of suppliers, and our customers to take care of.