Alex Gowell Corporation (AGC) is a coffee roasting company in North Vancouver. The company has experienced an incredulous growth in the last 2 years. The owner wants to be sure the growth is sustainable and is manage its working capital well. He is also worried about potential liquidity issues if AGC continues to grow at the current pace. You are the only accountant at AGC. The owner has tasked you with this project. He has mentioned that he would like to compile all the information pertaining to AGC's working capital in an excel document to provide recommendations on what financial strategies AGC should implement to better manage their working capital. Start of your document by illustrating and clearly explaining how profitable businesses can become bankrupt due to the mismanagement of their working capital. In your explanation, define what working capital is, along with its two main components, as well as the difference between cash flow and profits. Describe how businesses can mitigate this problem of going broke while still being technically profitable. RBC has recently offered AGC a one-year $2 million operating line of credit (LOC) at a rate of 6.25% in anticipation for year 2020. There is a monthly 0.75% commitment fee on the unused amount. AGC is considering taking this LOC, and wants to estimate its cash needs for the month of September 2020. The owner is looking for at least two other short-term financing options AGC could employ to assist with future cash flow shortages. He does not understand how revolving loans work and how they are beneficial to AGC. Explain. The owner estimates that if AGC takes the LOC, it will borrow only $1.25 million during January-September 2020 and further reduce by $0.2 million for the remaining 3 months. What is the effective annual cost (in percent) of the RBC operating line of credit arrangement?

The following sales forecasts have been made for 2020: August $400,000 September $300,000 October $300,000 November $200,000 December $200,000 Collection estimates were obtained from the credit collection department as 50% collected within the month of sale and the rest after. Management is considering whether to change this to more lenient credit terms that result in 35% of sales collected immediately and the rest a month later? Production costs will be 65% of monthly sales AGC pays half of its bills immediately and the other half in the following month. The company holds 2 months of sales in inventory General administrative expenses paid in the months of October and November are $40,000 and $44,000, respectively The corporation tax rate is 40%. Estimated tax liability are to be paid quarterly (i.e. March, June, September and December), though adequate provisions are to be are every month for taxes. The ending cash balance in September is anticipated to be $16,000. The owner would like to see a cash budget for October and November 2020

Answer rating: 100% (QA)

Answer Mismanagement of working capital can lead to profitable businesses becoming bankrupt despite generating profits Working capital refers to the d... View the full answer