The need for additional financing is a result of multiple factors that placed intense pressure on available cash. The first factor is the extraordinary growth AMT has experienced the last few years with an annual sales growth rate of 52.88%. The extreme growth rate in sales was accompanied with heavy spending on research and development along with rapid expansion in the company’s sales force and other marketing expenditures. What made matters worse is the company has incurred operating losses, which meant that generating cash from operations was at best limited or insufficient.
The second major factor is the inefficient use or mismanagement of some of the current assets accounts, namely Accounts Receivable and Inventories. When it comes to Accounts Receivable, it can be seen that in 1985, which is the most recent full year of operation, the company’s Days Sales Outstanding is 70.9 days versus the industry’s average of 55.1 days. This indicates that customers are taking much longer to pay AMT.
AMT ranks among the worst companies in this category (bottom quartile). Regarding inventories, the picture is even grimmer. In 1985, AMT’s inventories as a percent of its total assets were 46.3% (or 9,762÷21,077). This is twice the industry’s average of 23.0%. Perhaps one number explains this mismanagement. The Cash Cycle has been deteriorating the last three years from 181 in 1983 to 277 days in 1985. This means it is taking AMT 277 days between paying its vendors and collecting from customers. It is evident AMT has tied significant amount of cash in both accounts receivable and inventories, which in turn is creating a need for external financing. The two-year growth rate for accounts receivable is 53.37%, AMT is selling a lot on credit to its vendors and they are acting like a bank when they need more capital, which is why they are so tight on cash.
2. Is AMT profitable? How much cash is required for its operations?
AMT has not been profitable for the last 3 years and relied heavily on short-term financing to cover the losses including but not limited to overdrawing and exceeding its limit, and now seeking for additional loans. As a matter of fact, the financial statements show that 1985 had the most losses in those three years ($1,487,000). The financial model (given) shows that AMT will become profitable in 1986 and subsequent years. This is true as long as the assumptions employed in this model are relatively accurate. That is, sales growth rate is approximately 30%, and Cost of product sold and SG&A as a percent of sales are 45% and 40% respectively.
The amount of cash required for its operations:
1. Currently, the company is $652,000 in the hole. Cash balance on the balance sheet is negative. 2. Currently, the company’s current liabilities (those due within 1986) are over $9,942,000 as seen on the balance sheet. 3. The credit line with Sunnyvale Bank is exhausted.
4. AMT is seeking $8 million from Western National Bank in order to make these upcoming payments. 5. Looking at the “Model” provided, it appears that Total External Financing Needed to support the operation/growth over the next few years is drastically increasing every year. The last two years (1984 and 1985), Total External Financing Needs were $6.92 million and $5.95 million respectively. In the upcoming years, the expected Financing Needs will rise from $2.1 million in 1986 to $13.4 million in 19990. These figures are obtained by taking into account operating working capital growth over those years and the many assumptions made. Below is a brief description of the various accounts/assumptions that play a key role in determining the operation’s financing needs: • Long-term assets as percent of net sales are expected to be at 14%. • Current assets in the form of Accounts receivable and inventories are expected to be managed...