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Over the thirty-nine weeks ending 3rd November 2007 and 28th October 2006 examined the cash and cash equivalents encountered drastic changes. Cash and cash equivalents basically represent short-term highly liquid investments that can be easily converted in the form of cash. In the first period analyzed an increase in cash and cash equivalents of $11,200,000 took place. However, in the send period ending 3rd November, a fall in cash and cash equivalents amounting to $25,140,000 occurred.
Such movement highlights a preoccupying decrease in the cash flow of the organization especially in light that the cash and cash equivalents of the corporation decreased by 12% in such time frame. At this stage a drastic measure, which states that management is not running the organization properly in terms of cash should not be immediately taken. There is the possibility that executive management have properly invested the money in profitable projects. If this is the case managers should be appraised and not criticized.
It is therefore pertinent that an examination of the cash flow statement together with the relevant notes disclosed is conducted in order to derive an appropriate conclusion. 1. 1 Salient movements in Cash Flow Statement The aforementioned examination will commence by identifying the key movements in the cash flow statement and conduct a horizontal analysis on such changes. As regards the operating activities, the net income of the organization increased by 113% in the periods examined, which is a positive feature for the cash flow from operating activities.
Indeed the net cash provided by operating activities increased by 56. 61%. The main working capital element that is absorbing a substantial part of the operating cash flow is the investment in merchandise. This increased by 20% in the periods analyzed. Apart from the good rise in profits management were capable to diminish the negative effect of the above-mentioned factors by extending the credit limits of trade creditors. In fact a net cash benefit of $71,750,000 took place in the period ending 3rd November through such credit extension.
The analysis of the operating activities section, in this respect, reflects that management is administering the money of the organization properly. This implies therefore that the reduction in cash and cash equivalents stemmed from investing and/or financing activities. The investments of the company in property, plant and equipment rose rapidly by 106% when compared to the investing activities of the previous period. This decision is probably in line with the growth strategy that the company is conducting.
Indeed the organization opened nine new stores, seven factory stores, one crewcuts standalone store and one Madewell store in the period under consideration. If such investment is capable to enhance the financial performance of the company, the cash flow of the firm will benefit in the long run. Such positive prediction is already implied at this stage in light with the higher profitability. The reduction in cash and cash equivalents in the period ending 3rd November is also the result of a material payment of long-term debts.
In fact the net cash used in financing activities was 284% higher than the previous period. In the financial period ending 28th October the cash outflow stemming from financing activities was lower due to an issue of common stock amounting to a cash inflow of $402,750,000 and the attainment of loans reaching $276,516,000. This managed to offset the cash outflow arising from redemption of preferred stock and repayment of matured debts. At this stage we can conclude that the cash is being managed properly.
However the question on the risks the company is facing due to lower cash and cash equivalents have not yet been answered. In this respect the application of appropriate cash flow ratios will be conducted in the proceeding section. 1. 2 Cash Flow Ratios on J. Crew Company The current cash debt ratio, which is computed in the next section, indicates the ability of the organization to cover its short-term liabilities from the cash flow from operating activities.
The increase in this ratio indicates a better financial flexibility of the firm and is thus a positive sign on the financial position of J. Crew Company. The ability of the organization to generate cash flow from sales diminished during the periods as indicated by the cash margin ratio. This is partly arising from the high investment in fixed assets. Even though there is such a decrease, the cash flow of the organization seems financially stable and positive comments can be provided in the cash management of the firm.Sample Essay of PaperDon.com