Mary Margaret Glenn knew the going would be tough the first couple of years. She
ID: 2762937 • Letter: M
Question
Mary Margaret Glenn knew the going would be tough the first couple of years. She was now finding out exactly how tough. After five years of working for others, Mary and her former college roommate had pooled their resources and purchased a small building not far from the college campus. In it, they served gourmet coffees and specialty pastries. Business was good, when ‘‘good’’ was defined as consistently increasing weekly sales levels and strong profit margins. Unfortunately, during the recently completed campus Spring Break, their sales volume fell significantly (about 80%). As Mary’s roommate pointed out, however, the expenses did not fall. Rent, insurance, utilities, and lease payments were just a few of the operation’s expenses that did not take a break during Spring Break. As a result, cash was tight. The operation would make its bi-weekly payroll, but not by much. Fortunately, the students had returned, and so had revenues. But it had been a narrow escape—too narrow, thought Mary.
What are some specific finance-related activities you could suggest to Mary to avoid a cash flow crisis the next time her business volume reduces dramatically? Which of all your suggestions do you believe you would implement if you found yourself in Mary and her roommate’s situation? Why?
Explanation / Answer
Answer:
I would suggest following finance related activities to Mary to avoid a cash flow crisis,
1 Mary should contact with her bank and ask for bank overdraft facility, this will allow marry to continue her business in spring breaks (off season) without any cash flow crisis.
2 Mary should increase operating margins of products to cover fixed expense of whole year.
3 Mary should create emergency fund account if overdraft facility from bank is not available, this will work as same way as overdraft with an additional benefit of saving in interest cost of bank overdraft.
If I were in the same situation like Mary and her roommate than I would implement all the suggestions mentioned above. I will choose emergency fund before bank overdraft facility due to saving in interest cost, both of these suggestions offer cash flow cushion during the time of spring break(off season), when revenues are very low. I will also increase my operating margins(if its do not have adverse effect on revenue due to competition), which can cover my fixed cost even during off season. I will also try to find out alternative business during spring break, this will help me to generate additional revenue and it will also help me in paying my fixed cost.