Asked by Rukhna Chaudhry on Jun 14, 2024
Verified
Farm Store, Inc. reported the following data in its December 31 annual report. Cash and cash equivalents $1,050,000 Negative cash flow from operations (420,000)\begin{array}{lc}\text { Cash and cash equivalents } & \$ 1,050,000 \\\text { Negative cash flow from operations } & (420,000)\end{array} Cash and cash equivalents Negative cash flow from operations $1,050,000(420,000) Required
(a) What is the company's "cash burn" per month?
(b) What is the company's ratio of cash to monthly cash expenses?
(c) Interpret the ratio you computed in part
b. What are the implications for Farm Store, Inc.?
Cash Burn
The rate at which a company spends its cash reserves, especially in the context of startups or new ventures.
Monthly Cash Expenses
The total amount of money spent by a business within a month for operational activities, excluding non-cash expenses.
Cash Equivalents
Short-term, highly liquid investments that are readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in value due to changes in interest rates.
- Evaluate the cash flow of a business, its expenditure rate, and the relationship between cash on hand and monthly financial obligations, and understand their significance for the enterprise's durability.
Verified Answer
KG
Kenyth GrahamJun 15, 2024
Final Answer :
(a) $420,000/12 = $35,000 per month
(b) $1,050,000/$35,000 = 30 months
(c) The ratio computed in part b means that as of December 31, Farm Store, Inc. will run out of cash in 2½ years unless it changes its operations, sells investments, or raises additional financing.
(b) $1,050,000/$35,000 = 30 months
(c) The ratio computed in part b means that as of December 31, Farm Store, Inc. will run out of cash in 2½ years unless it changes its operations, sells investments, or raises additional financing.
Learning Objectives
- Evaluate the cash flow of a business, its expenditure rate, and the relationship between cash on hand and monthly financial obligations, and understand their significance for the enterprise's durability.