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Cape Chemicals

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Cape Chemicals Implementation of one day delivery coupled with unenforced accounts receivable terms has lead Cape Chemicals to tremendous growth. Unfortunately, these policies have also caused cash flow deficiencies in the form of high inventory and lack of receivables collected. Being that inventory and accounts receivables make up most of the working capital factor, high ratios of either in comparison to sales can prove to be detrimental. This case does an excellent job in providing an example of this situation. With that being said, if no drastic changes are made, Cape chemicals runs the risk of growing itself out of business. Scenario one, assuming high growth and business as usual, shows the shape that Cape Chemicals is in. Right away we can see that their costs are extremely high. A business such as Cape Chemicals should have a profit margin somewhere around 3%, whereas it is currently 1.74%. Working capital is notably large, as stated earlier due to very high levels of inventory and accounts receivables. This scenario amounts to an increasingly negative free cash flow and an astounding accumulation of debt. In just 4 years, debt is projected to go up about 150%. For comparison, in that same time frame sales are only projected to increase a total of 86%. Furthermore, costs are increased due to a decision to triple the workforce, a decision that proves to be unwarranted by the overall growth rate of this company. This scenario clearly highlights Cape Chemical’s growing pains that would inevitably run them out of business. Scenario two depicts how low growth would benefit the company. In this scenario, Cape Chemicals also has continuously falling free cash flows and increasing debt. However, in a situation of low growth, debt only increases by 42%, while sales increases by 118%. Compared to a high growth scenario, this looks pretty good. Albeit both are

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