Poor management of debt has affected the cash flow of Riley since it has postponed some of its decisions due to insufficient credit facilities. Consequently, this has made most of its suppliers to demand cash payments. Similarly, it is like Riley has been using the line of credit facilities to cover the monthly losses instead of funding the profitability growth of the company. This is why the company is slowing down gradually.
Riley was experiencing some technical problems regarding the unpaid accounts receivables especially in 2006. The situation made Riley to remain with limited cash to settle the bills owed to the suppliers that created some cash shortages. Moreover, this left Riley without the necessary cash that can cover for the obligations for the cash outflows.
The length for “CCC” for Riley are 104.66, 87.75, and 72.87 for 2004, 2005, and 2006 respectively. It indicates that the length is long especially in 2004 reflecting that the company is poorly managed thereby discouraging potential investors. The cash flow conversion cycle is long because Riley takes longer days to pay its creditors.
Riley had a net cash flow of (24) in 2006, and this represents a negative change showing that the business is threatened because it is insolvent as it lacks the capacity to meet the obligations of its suppliers and other creditors. Consequently, Riley might collapse in the operation of the business regarding this insolvency state. Therefore, lenders such as financial institutions are not willing to lend Riley to inject the additional cash to finance the operating costs and to cover for some debts.
The gap that exists between cash flows may leave the Riley business with limited income to cover the bills and debt repayments. The main problem that Riley is facing regarding its cash flow is that it has more expenses that are outstripping its earnings to (2%) only. The causes of this problem are the dipping sales, the stagnant inventories, and poor debt collection. The decrease in sales as presented in the case study slows down the conversion of inventories and this lead to fewer revenues. On the other hand, poor debt collection will tie up the capital of Riley to the trade receivables.
Solutions
Similarly, Riley should fine-tune its inventories for it to stock the products for the shortest period possible before they are sold out or used during the manufacturing processes. This is because any amount of goods that the company is keeping in stock will depend on the company's volume, forecasts of sales, the available cash and the capability of the suppliers. Therefore, Riley should monitor the level of its inventories because when the main products are not in the store, key customers will be lost.
Riley’s partner
Riley’s partner should take appropriate financial plans to save the business from liquidation and should not allow Riley to own 40% of the shares. The co- investor should adopt the use of purchase order financing to provide finance to a large volume of sales to exceed the capability its cash flow. Moreover, when this method is applied properly, it can improve the cash flow of the company, and this will enable Riley and the partner to finance the expenses of the suppliers that are linked to the purchase of large orders. Consequently, the sales forecast may increase by 30% in 2007 as projected.
