Challenge / Problems to be solved
The Company Board needed to evaluate different funding options for a facility expansion. Equipment imported and commissioned during a 18 month period. At the same time business as usual generating cash flow, with foreseen expense escalations. Various loans and loan tenors were available as well as an existing overdraft facility. The question was what was the best overall funding strategy, minimising costs and avoiding potential refinancing or additional requirement for financing.
Solution & Methodology
At a high-level existing management accounts and budgets gave a view on the potential future business as usual cash flow generation. In addition, escalation dates, escalation factors had to be applied for the forecast period.
The expansion project capital requirements had to be costed and foreign exchange implications analysed as well as payment terms and dates determined.
Using opening account balances, the existing business had to be forecasted using expected changes to past trends. This had to take into account changes in working capital. The new expansion capital outflows had to be overlaid on the existing business cashflow to determine monthly cash position.
Various loans, with specific interest and repayment profiles were applied to generate a series of financing option outcomes (monthly cash position and ending cash balance.) taking into account tax implications.
A clear preferred financing option emerged. This financing option was then tested doing various sensitivity anlysis on key input assumptions and potential changes to existing business cash flows.
Results achieved
The analysis showed a clear preferred financing solution. In addition, the preferred solution was subjected to a series of key assumption sensitivity analysis. This allowed the Company Board to quantify potential risks in changes to:
- Foreign exchange rates
- Existing business volumes and pricing
- Changes in interest rates
- Changes in debtors and creditor days
- Changes in key Operational costs
