Purpose: To help you understand the importance of cash flows in the operation of a small business.
You are the chief operating officer (COO) of a small public corporation. The company just completed its fiscal year, and the annual meeting is just a few weeks away. Your company has had a pretty good year despite the rough economic climate your industry has been weathering. In spite of that, the share price has maintained its high level. But here’s the dilemma: The corporation has paid out a cash dividend every year since its inception, but this year you have some concerns about continuing that tradition. Cash flows during the latter part of the year have been slow because your customers are taking longer to pay than they normally do. There's also the concern about the lump sum payment on the mortgage that is due in a couple of months. You’ve got to have sufficient cash for that. You’ve already had some inquiries from shareholders about the amount of the dividend that the company will be paying out this year. You've answered all the inquiries with a very positive tone, but the whole while you’re wondering if there will even be a dividend this year. You’re certain that the important shareholders would understand if the corporation had to forego paying a dividend this year. Or would they? You decide to have a meeting with the controller to discuss the situation.
What would be the most viable suggestion that your controller might make to you as an alternative to paying out a cash dividend this year? What are the implications of your recommendation?