Elise Hoffman recently purchased Ontario Products, a distributor of crafts and gifts to retailers in the Muskoka region of Ontario, Canada. After three months of operations, Hoffman’s supplier called very upset because his bank had returned Hoffman’s last two cheques to him as NSF (meaning not-sufficient funds). He demanded that Hoffman personally bring him the $800 owed in cash and said he would no longer ship orders to her until her cheques had cleared the bank (about a week’s time). Hoffman did not know what had gone wrong since she was certain the business had been operating at a profit. Questions at the end of the case direct students to find out what has happened and why the company has a cash flow problem.
Students learn that as a business grows or when seasonal sales fluctuations occur, the uses of cash can exceed the business’s ability to generate the cash needed. In these cases, other sources of cash must be tapped to make up for the shortfall due to this timing of cash flows. The case also reinforces to students that the “earnings” figure from the statement of earnings (income statement) is rarely equivalent to the business’s cash balance.
The creation of a statement of earnings, a statement of financial position, and a cash flow statement (wherein the sources and uses of cash are clearly identified) for the past three months and the next month. Students will then pursue an analysis (and may use a spreadsheet for this analysis) of the options for addressing this cash flow shortage. Options considered may include reducing the age of accounts receivable, increasing the age of accounts payables, obtaining a working capital loan, or additional investment by the owner in the business.