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Describe And Quantify Historical Liquidity Trends And Underlying Drivers (Essay Sample)

Instructions:


Describe and quantify historical liquidity trends and underlying drivers.
· Describe if liquidity is adequate to support the ongoing needs of the business and provide sufficient margin for operating financing.
· Assess current ratio and/or working capital relative to financial covenants proposed, if applicable.
· If the proposed financing has a material impact on the entity’s liquidity, summarize pro-forma liquidity (i.e. what would the balance sheet look like if the company made a large cash purchase).
o Sensitivity analysis. For example, if cash decreases significantly (the company needs to make a large cash purchase) what happens to liquidity? If sales are not as high as we expect, what happens to liquidity? If COGS increase what happens to liquidity?

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Content:


Rabobank, N.A. Case Study
Shaw Family Farms, LLC
Name
Course
Date
Describe and quantify historical liquidity trends and underlying drivers. 
The current ratio (the ratio of current assets to current liabilities) increased from 2015 to 2017 driven by higher growth in the current assets, but the current liabilities grew at a faster rate in 2018 and the current assets decreased. The farm had lower cash holdings in 2018 at 517,528, less even as the cash invested in growing crops increased over the four year period. The operating line of credit was 999, 000 compared to only 9,410 in 2015.
Describe if liquidity is adequate to support the ongoing needs of the business and provide sufficient margin for operating financing. The current ratio is above 1 and this indicates that the short-term creditors are covered by assets that can be converted to cash fairly. The ratio also indicates that there are no concerns about the short-term solvency, but since it is may also show the inefficient use of assets, especially cash.
Assess current ratio and/or working capital relative to financial covenants proposed, if applicable.
Working capital is the current assets minus the current liabilities
Before financial covenant
2015201620172018Current Assets11,552,61215,888,68317,998,01115,311,238Current Liabilities3,678,9664,405,5414,617,3596,247,705Working Capital7,873,64611,483,14213,380,6529,063,533
In 2019 there would be additional operating line of credit of $ 500,000 and the new $1 million loan for equipment purchases. This means that the current liabilities increase by $ 500,000, the noncurrent liabilities increase by 1,000,000 and long term assets by 1,000,000. The working capital falls because of the increased level of current liabilities.

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