The Genesis Energy Operations Management Team Is Now Prepare ✓ Solved

The Genesis Energy Operations Management Team Is Now Preparing To Impl

The Genesis Energy operations management team is now preparing to implement the operating expansion plan. The planned foreign expansion requires Genesis Energy to have a reliable source of funds for both short-term and long-term needs. One of Genesis Energy’s potential lenders tells the team that in order to be considered as a viable customer, Genesis Energy must prepare and submit a monthly cash budget for the current year and a quarterly budget for the subsequent year. The lender will review the cash budget and determine whether or not Genesis Energy can meet the loan repayment terms.

Genesis Energy’s ability to repay the loan depends not only on sales and expenses but also on how quickly the company can collect payment from customers and how well it manages its supplier terms and other operating expenses. The Genesis Energy team members agreed that being fully prepared with factual data would allow them to maximize their position as well as negotiate favorable financing terms. The Genesis Energy management team held a brainstorming session to chart a plan of action, which is detailed here. Evaluate historical data and prepare assumptions that will drive the planning process. Produce a detailed cash budget that summarizes cash inflow, outflow, and financing needs.

Identify and compare interest rates, both short-term and long-term, using debt and equity. Analyze the financing mix (short/long) and the cost associated with the recommendation. Since this expansion is critical to Genesis Energy expanding into new overseas markets, the operations management team has been asked to prepare an executive summary with supporting details for Genesis Energy’s senior executives. The management team developed realistic assumptions to construct a working capital budget.

Sales: The marketing expert and the newly created customer service personnel developed sales projections based on historical data and forecast research. Other cash receipt: Rental income $15,000 per month. Production material: The production manager forecasted material cost based on cost quotes from reliable vendors, the average of which is 50 percent of sales. Other production cost: Based on historical cost data, this cost on an average is 30 percent of the material cost and occurs in the month after material purchase. Selling and marketing expense: Five percent of sales. General and administrative expense: Twenty percent of sales. Interest payments: $75,000—Payable in December. Tax payments: $15,000—Quarterly due on 15th of April, July, October, and January. Minimum cash balance desired: $25,000 per month. Cash balance start of month (December): $15,000. Available short-term annual interest rate is 8 percent, long-term debt rate is 9 percent, and long-term equity is 10 percent.

Based on this information, do the following: Using the Cash Budget spreadsheet, calculate detailed company cash budgets for the forthcoming and subsequent years. Summarize the sources and uses of cash, and identify the external financing needs for both the forthcoming and subsequent years. In an executive-level report, summarize the company's financing needs for the forecast period and provide your recommendations for financing the planned activities.

Be sure to comment on the following: Your recommended financing solution and cost to the firm; if Genesis Energy needs operating cash, how should it fund this need? Are there internal policy changes with regard to collections or payables management you would recommend? What types of external financing are available? Your concerns associated with the firm's cash budget. Is this a sign of weak sales performance or poor cost control? Why or why not?

Paper For Above Instructions

The Genesis Energy operations management team is undertaking an essential step by preparing a monthly cash budget for the current year and a quarterly budget for the subsequent year. This measure is critical for securing the necessary funds to support the firm's planned foreign expansion. A well-structured cash budget will provide a comprehensive overview of cash inflows, outflows, and overall financing requirements that will be indispensable for discussions with the lender regarding potential loan terms.

To start with the budgeting process, it is crucial to assess historical sales data and define realistic assumptions to drive the planning process effectively. The historical sales performance will offer a solid foundation for projections. According to previous data, the marketing team projects sales based on both previous growth rates and market research. This includes identifying potential markets and competitive landscape which may affect sales during the upcoming years.

For cash receipts, a consistent rental income of $15,000 per month contributes positively to cash flow. This predictable income stream can help bridge short-term cash shortages and lower the overall financing pressures during periods of slow sales. In terms of production materials, the production manager has forecasted material costs to be 50 percent of the projected sales. This forecast will necessitate diligent cash management, as the firm must ensure that it collects payments efficiently from customers to cover these costs promptly.

Other production costs are estimated to be 30 percent of material costs, which are incurred in the following month after the material purchase. This aspect of expenditure emphasizes the need for meticulous tracking of cash flows to ensure that the firm can meet its obligations without incurring additional debt unnecessarily. Furthermore, selling and marketing expenses, which account for 5 percent of sales, will need to be managed to align with overall budgetary constraints.

General and administrative expenses are projected at 20 percent of sales, which also necessitates close scrutiny by the management team to avoid any undue strain on cash resources. Additionally, the firm must prepare for interest payments scheduled at $75,000 in December and quarterly tax payments amounting to $15,000 due on the 15th of April, July, October, and January.

The initial cash balance starting in December is projected at $15,000, with a minimum cash balance target of $25,000 per month. This indicates a potential shortfall that will need to be addressed to avoid liquidity issues. The planned foreign expansion adds another layer of complexity, as it requires careful consideration of financing options, interest rates, and the associated costs of debt and equity.

The currently available interest rates are 8 percent for short-term loans, 9 percent for long-term debt, and 10 percent for long-term equity financing. These rates should incentivize careful evaluations of how much financing the company should pursue through debt versus equity to minimize overall costs while meeting cash requirements for operations and expansion plans.

Following the completion of cash budgets for both the current and subsequent year, a detailed analysis of the sources and uses of cash will follow, revealing potential external financing needs. Should there be a necessity for operating cash, exploring a mixture of both short-term loans and longer-term financing options may present a solution to avoid cash shortages. Additionally, recommendations for operational policy adjustments regarding collections practices and payables management could help to optimize the overall cash flow strategy and enhance liquidity.

Moreover, evaluating the firm's present cash budget should help determine if cash flow issues arise from weak sales performance or if it is symptomatic of poor cost control. Identifying the root causes of the financial challenges faced by Genesis Energy is crucial for developing effective strategies moving forward. By perceiving the existing dynamics, the operations management team can proactively address any deficiencies and ensure sound financial health.

In conclusion, the task of preparing a comprehensive cash budget, analyzing financing options, and developing a set of recommendations is pivotal to the success of Genesis Energy's expansion initiatives. Effective cash management, along with prudent financial planning, will empower the firm to secure necessary funding and enhance its position in new overseas markets.

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