Cape Chemical Case: Cash and Profits
Throughout history, the business community doesn’t necessarily think of a chemical, wholesale distributor, as having the ability to reach double-digit growth rates, all while revolutionizing the distribution process. But that is exactly what Cape Chemical has done. By offering “next day delivery,” the company was able to differentiate itself from its competitors and gain a significantly larger market share than those same adversaries. But with the new increase in demand, a lack of borrowing power, a very “loose” accounts payable collection system and a growing inventory pool, Cape Chemical ran into cash flow issues. Since they are running into cash flow issues now, even with double-digit growth rates year over year, we can only assume that the company will have a even larger financial burden when those same normal, growth rates slow. I have outlined three scenarios, all of which will benefit Cape Chemical almost immediately, and most importantly, benefit and lower their financial stress in the long run. I also have left an open mind about the possibility of a combination of scenarios as being Cape Chemical’s best option going forward. The three scenarios are all relatively simple fixes, and are as follows: tighten the schedule of when customers pay their bills, keep lower inventory levels and lastly, lower, both, fixed and variable costs that the company may endure throughout the year. Scenario one starts with Cape Chemical letting its customers know that they will begin following a “hard” 30 days accounts payable payment structure. By receiving payments in a more controlled and regulated schedule, the company will always know what money will by be coming in, from whom, and when. As you can see from Figure 1, starting immediately in 2008, free cash flow is increased by a little over 4 million dollars. This trend continues into 2009 and 2010. Scenario one is probably the only situation that can, and most likely will, be...
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