2. Identifying Borrowing Causes Questions

If you are talking to a customer who is explaining that her company is experiencing sales growth and the business needs a loan, which is the most likely underlying cause of the cash shortage?

Sales growth (When sales grow, accounts receivable and inventory usually increase proportionately in order to support the higher level of sales. This creates a need for more cash, which is sometimes met through borrowing. Operating expenses may also grow as a result of sales growth, but this is not necessarily always the case.)

What are trading assets?

Many lenders refer to accounts receivable and inventory together as trading assets, because they are involved in the operating (trading) cycle of a company’s business.

A business is growing rapidly, and sales are increasing 20% to 25% each year. It is, however, operating in a very competitive industry and its rapid growth has only been achieved by reducing its profit margins. Assuming all other aspects remain the same, what is the most likely effect on its borrowing needs?

Borrowing will most likely have increased during the period.

What is the impact of sales growth on Brook Plumbing’s borrowing needs?

he business has long-term sales growth and a seasonal sales peak, both of which are potential borrowing causes.

What are the implications of a buildup in trading assets during seasonal peaks?

The buildup in trading assets during seasonal peaks often creates seasonal needs for temporary financing. Higher levels of inventory are needed to support the increased sales. the increased sales generate more receivables which are waiting to be collected.

What causes short-term sales growth?

Major price reductions or an external event like an ad campaign that boost sales for a short period of time

What does a lower ARDOH amount indicate, and what does a higher ARDOH amoutn indicate?

A lower ARDOH indicates faster collection and better cash flow, while a higher ARDOH may signal delayed payments or inefficient credit management