Fly by Night case
1. The biggest evidence I found about Fly-By-Night’s cash flow problems while looking at its financial statements was the reckless expenditures on fixed assets compared to their sales. As we can see, cash flow from investing went from ($5,437) to ($52,879) to ($34,260) between the years 12, 13 and 14, while cash from operation went from $2,110 to $16,902 to $9,883 between the years 12, 13 and 14. Even though there were large increases in long-term borrow during that time, long-term debt repayments started to pile up and overwhelmed the cash received from sales. I believe this could have happened because FBN’s managers overstated the projected sales when evaluating the purchase of new fixed assets and/or didn’t negotiate the terms of financing that best served those projected sales. Another reason why Fly-By-Night was facing cash flow problems by mid-year 14 is the increases in accounts receivable compared to the increases in sales. From year 11 to year 12 accounts receivables went up by 79.53 percent, 82.21 percent from year 12 to year 13 and from year 13 to year 14, they went up by 34.28 percent.
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Even though this isn’t the main reason why FBN is facing serious cash flow problems, it is definitely something that they should take care of. Those increases in accounts receivables could be justified if sales had increased in a greater proportion during that period, but in reality, sales went down by 7.74 percent between year 11 and 12, they went up by 76.30 percent from year 12 to year 13, less than the increase in accounts receivables, but improved from year 13 to year 14 went sales went up by 50.25 percent, more than the increase in accounts receivables. These cash flow problems can be perceived by the fact that the company is not generating enough cash to pay neither their current liabilities nor their long-term liabilities. Their coverage ratio for year 14 was just 0.123 and their operating cash flow ratio for year 14 was 0.167. On top of that, their current and quick ratio are also alarming, 0.14 current ratio for year 14 and 0.08 quick ratio for year 14. 2. Fly-By-Night could avoid bankruptcy during year 15 by executing better managing practices, but even if they do that, they could still go bankrupt. The first thing they should evaluate is their fixed assets. By year 14, property, plant and equipment represented an 87.33 percent of the total assets, and the return on assets was an abysmal 0.0 percent.
This means that management has been extremely inefficient using the company’s assets to generate earnings. The only way they can improve this situation is by either selling those assets that aren’t productive or increasing their productivity. Along with that, FBN should refinance their long-term debt so they can spread out those repayments throughout several more years. Right now, the increases in current portion of long-term debt are overwhelming. For 2014 the increase was the 763.35 percent, a number that was more than 15 times higher than the increase in sales for the same year, by spreading the repayments for several more years this number should go down substantially. This practice will only work though, if FBN’s sales increase, at the same rate or even better, in the future due to the acquisition of those assets. If they can’t improve their return on assets, they won’t be able to repay their long-term debt even if they refinance it for 100 years. If FBN decides to cut 20 percent of their assets while maintaining their sales increase by 50 percent, the asset turnover would increase from 0.6 to 0.97 by year 15.
Also, by refinancing their long-term debt, current portion of the long-term debt will go down along with the cash outflows from investing. With sales projected to be at $82,482 for year 15, or 50 percent more than year 14, and the increase in accounts receivable $2,506.5, or 3 percent of the year 15 sales, FBN would receive approximately $79,975.5 in cash from sales. In order to get their operating cash flow ratio to at least one, current liabilities have to go down by $5,945.5, something that can only be achieved by refinancing their long-term debt so they can reduce the current portion of long-term debt. By doing that, Fly-By-Night could avoid going bankruptcy, but as I said earlier, it is not a sure bet. The company might still go bankruptcy even if they employ the practices explained above.