Use cash flow, working capital, liquidity, and financing facts to support short-case recommendations.
Cash and financing issues on CFE Day 3 usually test whether a recommendation is affordable, timely, and sustainable. The technical work may be simple, but the judgment is important: a proposal that is profitable on paper can still fail if the entity cannot fund inventory, payroll, loan payments, tax remittances, or required capital spending.
The first step is to identify the cash decision being requested. The case may ask whether to accept a large order, purchase equipment, draw on a line of credit, delay payables, seek equity, lease an asset, refinance debt, or reject an expansion. Each option has different effects on liquidity, control, risk, and stakeholder confidence.
This lesson focuses on short-case finance advice where cash, working capital, and financing constraints drive the answer. The goal is not to produce a full corporate finance memo. The goal is to identify the cash pressure, use the relevant numbers, compare practical funding alternatives, and make a supported recommendation.
| Question | Why it matters |
|---|---|
| When will cash be received and paid? | Timing can create a shortfall even when the transaction is profitable. |
| Which working-capital accounts move? | Receivables, inventory, payables, and deposits often explain the funding need. |
| What financing sources are available? | Debt, equity, leasing, supplier credit, and internal cash carry different limits. |
| What constraints apply? | Covenants, collateral, owner control, interest cost, and repayment timing may rule out an option. |
| What happens if the assumption changes? | Sensitivity to collections, volume, margin, or rates can change the recommendation. |
Day 3 cases often place profit and cash in tension. A special order may create contribution margin but require inventory purchases before collection. A new contract may increase revenue while stretching receivables. A capital purchase may reduce operating costs but require debt service before savings arrive.
A concise response should separate income statement attractiveness from liquidity feasibility. The statement “the project is profitable” is incomplete if the cash forecast shows a shortfall in the month before receipts are collected. Conversely, a tight cash month does not automatically mean the project should be rejected if a realistic bridge financing option is available and the risk is controlled.
Use a simple structure:
| Step | Short-case application |
|---|---|
| Identify receipts | Customer collections, deposits, financing proceeds, asset sale proceeds, tax refunds, or owner contributions. |
| Identify payments | Inventory, payroll, rent, tax, loan payments, interest, capital expenditures, and one-time implementation costs. |
| Time the movements | Match cash inflows and outflows to the case period rather than using annual profit only. |
| Calculate the gap | Determine the peak shortfall or minimum cash balance breach. |
| Recommend funding | Select the source that fits cost, timing, risk, control, and feasibility. |
Working capital facts are often more useful than a long calculation. Rising receivables may show collection risk. High inventory may show obsolete stock, weak forecasting, or cash tied up before sales. Stretching payables may protect cash temporarily but damage supplier terms. A high current ratio may be misleading if inventory is slow moving or receivables are doubtful.
In a short response, explain what the working-capital fact means for the recommendation. If the entity needs cash because customers pay in 60 days while suppliers require payment in 30 days, the financing need is not just a one-time problem; it is part of the operating cycle. The recommendation may require improved credit terms, deposits, invoice collection, inventory controls, or supplier negotiations.
A financing recommendation should be more than “borrow” or “issue shares.” It should explain why the source fits the case facts.
| Financing source | Fits best when | Main caution |
|---|---|---|
| Operating line of credit | Short-term working-capital timing gap. | Availability, covenants, interest, collateral, and renewal risk. |
| Term debt | Long-lived asset or project with predictable cash flows. | Fixed payments can worsen distress if assumptions are optimistic. |
| Leasing | Asset use is needed but ownership is not essential or cash is limited. | Total cost, accounting effects, termination terms, and flexibility. |
| Equity or owner contribution | Debt capacity is limited or permanent capital is needed. | Dilution, control, investor expectations, and timing. |
| Internal cash management | Small shortfall caused by collection or inventory timing. | May not solve structural profitability or capacity problems. |
| Supplier or customer financing | Negotiated terms align with the operating cycle. | Relationship damage or customer resistance if used poorly. |
The strongest answer selects the source that matches the duration of the need. A temporary receivable timing gap normally should not be solved with permanent equity if a controlled operating line is available. A long-term expansion normally should not rely on delayed payables if the project needs stable funding.
Use this compact framework when a Day 3 case contains cash and financing facts:
The condition matters. For example, “Use the line of credit if the bank confirms availability and collections remain within 45 days” is stronger than “borrow more money.” It shows that the recommendation depends on a fact that could change.
| Pitfall | Correction |
|---|---|
| Confusing profit with cash. | Time the inflows and outflows before concluding that the option is affordable. |
| Ignoring working-capital growth. | Include receivables, inventory, and payables when sales expansion requires upfront funding. |
| Choosing debt without checking debt capacity. | Consider covenants, interest coverage, collateral, and repayment timing. |
| Recommending equity by default. | Explain why dilution and control effects are acceptable under the facts. |
| Treating a one-month shortfall as permanent distress. | Separate timing gaps from long-term profitability or solvency problems. |