Fly by Night case
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. 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
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. 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