Organizations need additional funds from the external sources to increase the level of assets needed to support the companies increased sales. Getting the additional funding require in instrumental in managing the long-term liabilities. The ensuing segments look at the long term financial needs of Huffman Trucking in its bid to develop virtual operations where it will be one shop and key logistic entity.
External Funds Needed (EFN)
The external funding indicates the amount of money that will be required to finance the operation of business expansion. The method of getting the additional funds needed assumes that the company’s financial ratios will not change. The external funding for the Huffman Trucking is given by
Additional Funds Needed = Ao ×ΔS− Lo ×ΔS× S1 × PM × bSoSo
Where S1 are new levels of sales, L0 are the current liabilities, A0 are the current assets and b is the retention rate. The formulae have been designed to give out the external fund needed as the difference between the increase in the assets that the company has with the increase in liabilities and equity. A positive figure indicates that the company will require fund from the external sources and a negative figure will indicate that Huffman can be able to finance its operations in the year 2012 and beyond.
Additional Funds needed for the year 2012 = (162580 *0.08) – (99311*0.08*0.104)
= $12, 180, 000
This shows that the company will require addition $12, 180, 000 which cannot be generated from internal sources (that is the funding cannot be generated from the net income of the company). The fund can be obtained from the debt market or the equity market. In the debt market, the company will have high-interest loan payment obligations. In the equity market, the company will have to convince investors to provide capital. The company must raise $12, 180, 000 to finance the expected 8% sales growth. Extra cash requirement has mainly been caused by the costs of satellite warehouse and space rental costs as well as the cost of running the locations.
The ration analysis indicates the profitability of the company and its liquidity.
- Profit As a Percentage of Sales
The profit as a percentage of sales (net margin) measures a number of dollars that the company retains as earnings after taking out all the expenses. The higher the net profit margin, the higher the performance of the company in the period under the consideration. This is given by the: Profit as a percentage of sales = net profit/.sales. The profit as a percentage of sales for the Huffman Truck in 2011 is 5.33%, and in 2012 is projected to be 10.32%. This shows that while in 2011 the company generated $0.0533 of earnings from every dollar of sale, in 2012 the company’s performance is projected to increase where it will generate $0.1032 per every dollar of sales. The figures indicate that the profitability of the company is expected to in increase more than the increase in expenses.
- Current Ratio
The current ratio indicates the level of liquidity of an entity (Rao, 2013). A ratio of 1 indicates that the company can be bale to cover its short-term obligations when they fall due. In 2011, Huffman Truck had a current ratio of 1.63 which is expected to remain the same in 2012. A current ratio of 1.63 indicates that the company has a high ability to meet its short-term obligations when they fall due. This is an indication………………………………