ENT 650

WHAT IF Scenarios – ENT 650-Week 4

WHAT IF Scenarios

Scenario #1: Refer to your Accounts Receivable assumptions. If you do not currently have an Accounts Receivable policy assumption please create one that has a policy requiring your customers to make payment no later than 10 days after the date you bill them. In other words, your plan on operating your business basing your cash flows using the 10-day cash payments policy. What remedies are available to you to counter the effect of having your customers being late payers?

a. Compare the three financial statements that show the affect of bills being paid on the date due versus having bills paid 30 days after the due date. What action(s) will you take?

 

I plan to not have accounts receivable because I will require full payment when they book Kensie’s Cottage. But for the full time renters if they were 30 days late this would cause a huge problem with using that money to pay my mortgage, repair and maintenance around the house. I would have to take that money from my savings account and replenish it when they paid me. Actions I would have to take after not receiving payment for 30 days would involve sending out a late notice after 15 days and again after 30 days saying that they are now required to pay this month and last month at the 1st of the month or they will be charged a $25 late fee.

 

b. Now compare the three financial statements that show the affect of bills paid on the date due versus having bills paid 180 days after the issue date. What action(s) will you take?

 

After 180 days would be six months overdue for rent which would result in me having to pay over half my mortgage every month out of my savings. It would make things very difficult for me in those six months, I probably wouldn’t be able to spend any money on repairs, maintenance or improvements. I would have to put a hold on any renovations and really watch my spending for that time. As far as actions I would take, if it got to this point I would be trying to evict the tenant and get a lawyer involved and probably go to court. This would be extreme I hope that it will never come to this.

 

Scenario #2: Refer to your Accounts Payable assumptions. If you do not currently have an Accounts Payable assumption, please create one that has you paying your suppliers 10 days after you receive a bill (your suppliers payment policy). Is paying your bills helpful as a cash management tool? Is this an ethical practice?

a. Compare the three financial statements that show bills paid on the date due versus paying bills 30 days after the due date.

 

All of my accounts payable would be based on mortgage, utilities, home repairs, maintenance and renovations. I would set a scheduling goal to have all payables paid before 30 days. If cash levels got low out of my cash flow funds I may have to use savings for a month or two, hopefully not more than that, but would be replenished after receivables were transferred into cash. The Mortgage would be my top priority in payables. I would never want to damage my credit status or relationship with service providers so I would make sure to always pay within the 30 days. I should receive payment from long-term renters at the 1st of the month, and payment for the short-term rental throughout the month, I would use that money to pay for accounts payable. Since I am using that money to pay for accounts payable the statements should look about the same if it is paid on time or 30 after, 30 days after would just show the money that would be used for accounts payable in the cash flow, which would appear that we have more money than we do in that case. But once it is taken out for accounts payable the cash flow will equal out the same.

 

b. Now compare the three financial statements that show bills paid on the date due versus paying bills paid after 180 days after the due date.

 

After 180 the money that would have used to pay the bills on the due date will be sitting in the cash flow. So the statement will show that we have more money than we actually do. That money should be accounted for in the accounts payable. If bills are paid after 180 days I assume I would lose those vendors, probably get some sort of fine or late fee so this would end up costing me more money. I would probably be called by some kind of collections and be send notices by their accounts receivable department. This would be a horrible way to start off as entrepreneur, it would not only create horrible relationships with vendors but also ruin your reputation with other vendors, making it difficult to find companies to trust you.

 

Scenario #3 – Line of Credit

a. Create a Line of Credit assumption. Based on your pro forma financials how much cash would you need if you had a line of credit from your banker? How long will you allow your company to have an outstanding balance for your line of credit before you must pay it off?

 

I would want at least $2,000 in my checking at all times in order to cover mortgage every month and have some leeway. I would ideally like to pay off the credit card every month but if that is not possible then make the minimum payments every month and pay it off at least once a year.

 

b. Refer to your Accounts Receivable and Accounts Payable assumptions. Compare the three financial statements that show receivables and payables being paid on the date due versus the three financial statements showing receivables and payables being paid 90 days after the issue date. What is the effect on the outstanding balance of the line of credit?

 

If accounts receivable and accounts payable are paid on time then I would have a profit for the month that I could use to pay off the balance of the line of credit. If I do not receive payment from accounts receivable for 90 days I will have to put all the accounts payable on a line of credit adding up to at least $4000 for those 90 days, once the receivables is transitioned to cash I will be able to use that to pay off the line of credit after 90 days.

 

c. Refer to your Accounts Receivable and Accounts Payable assumptions. Compare the three financial statements that show receivables and payables being paid on the date due versus the three financial statements showing receivables paid 10 days after the issue date and payables being paid 90 days after the issue date. What is the effect on the outstanding balance of the line of credit?

 

If receivables and payables are both being paid on the due date then they will balance each other out, receivables will pay for payables leaving us with a profit. If are paid 10 days after then we will have that money in the cash flow, and if payables are not paid until 90 days after then that $4000+ will be sitting in the cash flow, that will be designated for the 90 days payables. So it will appear that we have more money than we do, which might get spent toward something else. The credit would show owing that $4000+ until it was paid off, which would up the monthly charges and interest, ultimately costing us more money.

 

d. Refer to your Accounts Receivable and Accounts Payable assumptions. Compare the three financial statements that show receivables and payables being paid on the date due versus the three financial statements showing receivables paid 90 days after the issue date and payables being paid 10 days after the issue date. What is the effect on the outstanding balance of the line of credit?

 

In the case where receivable are paid 90 days after the due date would put us in a tough situation and maybe not be able to pay the payables and would have put that on the line of credit until the receivables is turned to cash and able to pay off the line of credit with that money. So basically the effect on the outstanding balance of the line of credit will be the same as question C. where it will create an increase in monthly charges and interest on the line of credit which will ultimately cost us more money than if everything was received on the due date.

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