Since Gabrielle Gamble is already in her tenth year of operations, Gas and Stuff may indeed prove to be successful in its operations, considering that, thought explicitly mentioned, Gamble may have used distinctive strategies that make her series of convenience stores a hit especially in rural areas. However, since she has already been in that business for a decade, Gamble may have to consider venturing into competing in the urban areas of states, to gain more market share, and when appropriate strategies will be used, to gain more income and cash flows as what she actually wants.
Gas and Stuff may be gaining income for the past years. However, the owner, Gamble, feels she should be receiving bigger financial rewards from her own business. And she regards the cash flows as an indicator, which shows that there does not seem to be a large amount of cash at the end of each accounting period. Well, a small amount of cash does not necessarily mean that the business may not be earning much. A proof of this is that Gas and Stuff is still a successful chain considering that it keeps on earning income, making Gamble enjoy a moderate lifestyle from the earnings of her business.
Another probable reason is that a business may invest into its Accounts or Notes Receivable as its primary source of Sales, meaning the company is providing credit for its customers, or for those who do not have outright cash to pay. Also, the company maybe investing in some other forms of ventures probably simply for earning more income, or for expansion of investments or ownership. These probable reasons, especially the former, may contribute to the fact that a business may not have enough cash left at the end of the period, but still earning profit.
In the case of Gas and Stuff, since Gamble understands the need and the possibility of more success in investing in a highly competitive market, she now considers expanding the company in more populated or urban areas. However, as mentioned, opening out more chains in urban areas would entail a lot of costs for Gas and Stuff, therefore cash outflows, which Gamble does not necessarily fancy, and a lot of initial capital. Problem is, the local bank she has transacted with for the past ten years no longer considers loaning out to Gamble.
If Gamble would consider making use of the ‘suppliers of capital’, Gamble must consider the cost of capital, which is simply the cost of using money or funds from investors. If she intends to invest on debt, or long-term Payables from creditors, she must necessarily consider the cost of debt financing when it issues a bond or takes out on a loan, to be used for putting up her other business chains. Or she may consider investing in Preference Shares, if any, and her Ordinary Shares. Or it can actually be a mixture of these different capital components.
No matter, the minimum return that Gamble must consider is that her cash outflow for this new investment must be at least equal to, or better, lesser than her cash inflows, meaning the profit must be greater than the cost of capital. Investing in these kinds of resources may give Gamble more invested money to use in acquiring or putting up more convenience stores in urban areas.
In terms of dealing with the local bank, I suggest looking for other investors in her company, who will invest funds, resources or money, which will give her a source of capital. If not, she can ‘ask’ her current investors, who are at the same time her relatives and friends, to invest more money. This way, it would reduce her cost in terms of paying interest if she gets another loan from the bank.
If Gamble’s primary concern is her cash outflows and inflows, she might want to consider taking a look and analyzing carefully her cash flow statement, which is “the optimum resource for testing a company’s liquidity” (Weiss, 2000). Even when it comes to the computation of a company’s liquidity, the statement of cash flows must be used. Taken from the cash flow of operations are so many ratios that Gamble may use in assessing her own business move.
Focusing on ratios with regard to Gas and Stuff’s long term sources of capital, one of the ratios Gamble can use is the Funds Flow Coverage, computed as [Earnings before interest, taxes, depreciation and amortization / (interest + tax-adjusted debt repayment + tax-adjusted preferred dividends], which shows the ability of the company to procure sufficient cash to meet inevitable commitments such as interest and taxes. Another ratio that Gamble may use is Cash Interest Coverage, computed as [(Cash flow from operations + interest paid + taxes paid) / interest paid].
This will be especially useful in determining a company’s ability to make payments of interest on its entire debt, specifically if Gamble chooses to issue bonds. Another useful ratio in this case is Cash flow to total debt ratio [Cash flow from operations / total debt]. This measures the firm’s ability to meet future obligations in terms of debt, assuming cash flows are committed to payment of debts. Last, but not the least, is the Total Free Cash ratio. Computing this ratio, the company will be able to determine its ability to cover upcoming cash commitments. This way, Gamble will be able to determine how much cash will be left for her if ever she spends on different kinds of investments and expenditures.
All these ratios may prove very useful in assessing Gamble’s business move, specifically that her concern is more of her cash inflows and outflows. However, she must not and understand that these ratios are not absolute or it may vary from company to company, or from industry to industry. Moreover, these ratios may not be the only indicators of the success or failure of a company, especially that purpose may vary among different stakeholders like the owner herself, Gabrielle Gamble.
Weiss, P. (July 7, 2000). Calculating Cash Flow Ratios. Retrieved February 2, 2008, from http://www.fool.com/research/2000/features000707.htm.