2023 Economic entities are assumed to act rationally in their self interest Therefore consumers seek low prices and | Assignments Online

Economic entities are assumed to act rationally in their self-interest. Therefore, consumers seek low prices and best values. Investors seek high returns. Employees seek high incomes given a specific level of training and work. Business seeks high revenues and low expenses. Note that none of these entities are always successful in optimally satisfying their self-interests. Still, all strive to acquire the best information possible within the limits of information, and then make the best decisions possible at the time.

In this discussion, we will investigate why sometimes profitability is limited by cash flow.

This discussion will address the following Module Outcomes:

• MO1: Use different present worth techniques to evaluate and select from project alternatives. (CO1, CO2)
• MO2: Use different annual worth techniques to evaluate and select from project alternatives. (CO1, CO2)

 

Businesses form to take advantage of profitable opportunities. New projects or systems are implemented in existing businesses in order to increase profitability. With the tools from this module, you are exploring how to value these profitable opportunities using present value techniques and annual techniques of analysis. Even with profitability on the horizon, many businesses still fail. These failures are explained away as simply poor management, but often we hear of cash flow issues. What we find are businesses, particularly new businesses, with opportunities for profitable growth where their access to cash may be limited even when they are profitable.

A new company may find itself profitable but “cash poor” for the following two reasons:

1) Immediate payables but delayed receipts.
2) Increasingly larger orders or perhaps one significantly large order.

In the first case a company may be making profitable sales, but the receipts for those sales might not be coming in on time to meet or pay for expenses. Payroll expenses are immediate. Loan payments are on a schedule and must be made on time. A new company is still generally forming its relationship with suppliers and strives to make those payments quickly.

On the other hand, a growing new firm might find that its new customers make their payments, but they are often delayed. In fact, the new company may make sales expecting payment in 30, 60, or even 90 days and include that in a sales contract. Thus, the cash coming in is delayed enough that even though the company appears profitable, it does not have the cash to pay its immediate debts. In the second case, a company may find itself with a very profitable, but unusually large order and may not have the cash, supplies, or facilities to meet the order on time.

In this discussion, you are to:

• Further analyze (speculate or anticipate) what might lead to each of these situations.
• Discuss if these situations are limited to only new companies.
• Come up with ideas that could possibly overcome these two cash flow issues.
• As an engineer, come up with ideas to help management in these situations.