The Genesis Energy Operations Management Team Assignment (Case Study Sample)

The Genesis Energy operations management team is now preparing to implement the operating expansion plan. Previously, the firm’s cash position did not pose a challenge. However, the planned foreign expansion requires Genesis Energy to have a reliable source of funds for both short-term and long-term needs.
One of Genesis Energy’s potential lenders tells the team that in order to be considered as a viable customer, Genesis Energy must prepare and submit a monthly cash budget for the current year and a monthly cash budget for the subsequent year. The lender will review the cash budget and determine whether or not Genesis Energy can meet the loan repayment terms. Genesis Energy’s ability to repay the loan depends not only on sales and expenses but also on how quickly the company can collect payment from customers and how well it manages its supplier terms and other operating expenses. The Genesis Energy team members agreed that being fully prepared with factual data would allow them to maximize their position as well as negotiate favorable financing terms.
The Genesis Energy management team held a brainstorming session to chart a plan of action, which is detailed here.
* Evaluate historical data and prepare assumptions that will drive the planning process.
* Produce a detailed 2 year cash budget that summarizes cash inflow, outflow, and financing needs.
* Identify and compare interest rates, both short-term and long-term, using debt and equity.
* Analyze the financing mix (short/long) and the cost associated with the recommendation.
Since this expansion is critical to Genesis Energy expanding into new overseas markets, the operations management team has been asked to prepare an executive summary with supporting details for Genesis Energy’s senior executives.
Working over a weekend, the management team developed realistic assumptions to construct a working capital budget.
1 Sales: The marketing expert and the newly created customer service personnel developed sales projections based on historical data and forecast research. Please use the sales projections provided in the template. See “Download” in item 1 below.
2 Other cash receipt: Rental income $15,000 per month for Y1 and 20,000 for Y2.
3 Production material: The production manager forecasted material cost based on cost quotes from reliable vendors, the average of which is 45 percent of sales
4 Other production cost: Based on historical cost data, this cost on an average is 30 percent of the material cost and occurs in the month after material purchase
5 Selling and marketing expense: Six percent of sales
6 General and administrative expense: 18 percent of sales
7 Interest payments: $10,000—Payable in December Y1 and $0 payable in December Y2.
8 Tax payments: $15,000—Quarterly due on 1st of April, July, October, and January
9 Minimum cash balance desired: $25,000 per month
10 Cash balance start of month (December): $10,000
Available short-term annual interest rate is 8 percent, long-term debt rate is 9 percent, and long-term equity is 10 percent. All funds would be available the first month when the firm encounters a deficit
Dividend payment: None
1 Using the Cash Budget spreadsheet, calculate detailed company cash budgets for the forthcoming and subsequent year. Summarize the sources and uses of cash, and identify the external financing needs for both the forthcoming and subsequent years.
2 Download this Excel spreadsheet to view the company’s cash budget. You will calculate the company’s monthly cash budget for the forthcoming year and quarterly budget for the subsequent year using this information.
1 In an executive-level report, summarize the company's financing needs for the forecast period and provide your recommendations for financing the planned activities. Be sure to comment on the following:
1 Your recommended financing solution and cost to the firm: If Genesis Energy needs operating cash, how should it fund this need? Are there internal policy changes with regard to collections or payables management you would recommend? What types of external financing are available?
2 Your concerns associated with the firm's cash budget. Is this a sign of weak sales performance or poor cost control? Why or why not?
This documents intends to provide the necessary information to Genesis Energy Management team to decide and carry out the best strategy that the firm will select in its plans of international expansion.
We have explained in the previous documents the multiple ways to obtain capital. Genesis
has three options available to raise the funds needed for its expansion. These options are:
Short-term financing (this will cost 8% per year).
Long-term financing (at 9% per year)
Long-term equity (10% per year)
We have prepared a two year plan which means, this is a project that will require mostly long term financing, not only for the time frame but also for the amount of funds needed to finance this venture.
Theory says that short term financing is an excellent solution for day to day expenses, which that in mind, we can recommend the use of some short-term financing especially for the first 6 months of duration. Those funds however, will only be used for general and administrative expenses. We can observe that during the first year, Genesis will need a cash outflow of $3,787,000. This amount will cover mainly material purchases, production costs and taxes. We can conclude that such investment needs more than a year to be paid, otherwise the firm’s existence can be jeopardized. Therefore, long-term debt and equity will be necessary.
Lenders will be interested in seeing Genesis financial ratios to measure its financial strength. They will also evaluate the risk immersed in the venture and the market where expansion is planned. If investors see an attractive venture and low risk of failure, they will be more likely to provide the 9% rate on long-term.
For the first quarter of second year, Genesis will require $1,278,000 for operating expenses. However, we must consider that external financing sources will slowly decline once operations of the company began. By the end of the first year, the operation management team is expecting to obtain $5413500. The Genesis Energy team members are fully prepared to maximize production and it is confident to quickly collect payments from customers to manage its operating expenses.
According to the expectation (spreadsheet) this investment may find its peak by the last quarter of the second year. We can observe that $3,100,000 is expected to be collected during this time. Genesis team is very aware of the risk of this venture, however, the numbers showed in the excel documents are very realistic, considering the experience in the business and the attractiveness of the market selected for expansion. We can look a continuous growth on sales during this period (Q4 year 2) and if payments are collected efficiently in the percentage shown, it is very likely to reach those numbers.
The excel document shows the cash inflows activities during the first 12 months, with some struggle during the first half of the year ( something completely likely) but firm and strong by the end. We can conclude that by the second half of the first year, the company will not urge for newer long term-debt.
We must indicate that the company will need financing from lenders during the two years of the project, hence, it is important to explain the advantages and disadvantages faced by cash budgeting:
As we explained before ‘Short-term financing can cover payroll, utility charges and the purchase of raw materials by the business. Overdrafts, short-term bank loans, and trade credit are types of short-term financing’.
Some Short-term financing advantages can be:
* Flexibility
Overdraft protection. Banks will help companies to cover certain unexpected expenses in exchange of a small fee.
* Speed
Because they can be obtained between 60-120 days as lenders do not make thorough examinations as they would with long-term financing.
* Management
Lenders will not involve themselves in the company or firm that receives the money, therefore, they cannot restrict any management actions.
On the other hand, some disadvantages are:
* Risk
It can entail significantly higher risks as companies, during recession times can be more eager to appeal to it.
* Taxation
Short –term capital gains are taxed at your regular federal income tax rate. This does not happen with long term financing
(c) Time
Mostly, lender will require their money back in short terms which can be within 3-months, 6-months, 9-months. This can jeo...