Genesis Energy Cash Position Analysis

Genesis Energy Cash Position Analysis

Financial Management | B6022-P A01

Module 3, Assignment 2

A brief analysis of Genesis Energy’s cash flow statements shows that the company has strong sales but weak cost control. Apart from the reduced sales revenue in December which could just be as a result of seasonal factors; the company is growing as we show a steady pattern of an increase in monthly sales. However, with only ten percent of sales collected in the month of sale, and the rest of the ninety percent collected in the first, second and third month after sale, it is taking the company an average of over ninety days to collect sales revenue. Late collection on sales indicates ineffective accounts receivable management. The company is operating on a very high dayssales outstanding (DSO) or average collection period (ACP), which is the average length of time that the firm must wait after making a sale before receiving cash (Brigham &Ehrhardt, 2010).

In total, when all the sources and uses of cash are netted, Genesis Energy’s cash outflow exceeds its inflow every single month until August. This indicates that for over half the year, the company does not maximize its cash inflows. Downward trends or negative net cash flow from operations almost always indicate problems (Brigham &Ehrhardt, 2010). Full payment to material suppliers and other production costs are being made the month after purchase, even though all the cash from sales are not received for over three months after sales. Although this can be viewed as is a positive element as it shows that the company is meeting its accounts payable obligations on a timely basis, it also indicates ineffective accounts payable management as this will increase external cash requirement. Collecting accounts receivable on a timely manner and negotiating better accounts payable terms will help the company’s cash flow, which may in turn reduce the amount of external financing required and therefore reduced interest payment.

The company’s cash flow summary shows that external financing in the region of $450,000 to $550,000 will be required for the first eighteen months and this amount will increase from the third quarter of the subsequent year to $2,400,000. As mentioned above, external financing can be reduced by negotiating better accounts payable terms and collecting accounts receivable on a timely manner. Since the company may require financing for over a year, long term financing is recommended. Capital borrowed for a period longer than one year is classified as long term financing. This can take the form of debt financing like loans and bonds, which involves repaying borrowed funds plus interest at a predetermined time in the future, or equity financing, which involves giving up a portion of the ownership of the business in exchange for the capital raised in form of common or preferred stock. The company’s cash flow analysis shows that interest of $75,000 is paid every year which indicates that Genesis Energy has an existing loan. Equity financing has several advantages. For example, unlike debt financing which involves loans with interest repayment, there is no obligation to pay dividends to shareholders and there is no fixed maturity. Therefore Genesis Energy can raise capital by issuing new shares, or by retaining and reinvesting earnings. Rather than distribute earnings to its shareholders, earnings can be reinvested as capital. The interest of $75,000 paid in December will be eliminated with equity financing.

Bearing in mind the financial stress Genesis Energy is undergoing, it is very unlikely that dividends are going to be paid to shareholders in the very near future. The company does not currently have enough working capital which means that earnings will be affected.

Comparing the estimated external financing that will be required of $550,000 within the first eighteen months, and $2,400,000 long term, because of the added benefits, it will be beneficial for Genesis Energy to seek long term financing at 9% or equity at 10%. Since the interest rate difference is only 1%.


Brigham, E. F., &Ehrhardt, M. C. (2010). Financial Management: Theory and Practice, 13e,

13th Edition.[VitalSource Bookshelf version]. Retrieved from

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