Harvard Case - Gift Card Capital: Credit and Cash Flow Evaluation
"Gift Card Capital: Credit and Cash Flow Evaluation" Harvard business case study is written by Sybil Yang, Gordon Potter. It deals with the challenges in the field of Accounting. The case study is 9 page(s) long and it was first published on : Aug 25, 2020
At Fern Fort University, we recommend Gift Card Capital (GCC) implement a comprehensive strategy to address its credit and cash flow challenges. This strategy involves a multi-pronged approach, encompassing improvements to accounting procedures, financial analysis, and risk management practices.
2. Background
Gift Card Capital (GCC) is a rapidly growing company specializing in the sale of gift cards. GCC faces significant challenges related to managing its credit exposure and optimizing cash flow. The company's rapid growth has led to a surge in receivables, increasing the risk of bad debt and putting pressure on working capital.
The main protagonists in this case study are:
- John Smith: CEO of GCC, concerned about the company's financial health and its ability to sustain growth.
- Mary Jones: CFO of GCC, responsible for managing the company's finances and addressing the credit and cash flow challenges.
- The Board of Directors: Responsible for overseeing the company's overall strategy and financial performance.
3. Analysis of the Case Study
This case study can be analyzed through the lens of financial management, specifically focusing on working capital management, credit risk management, and cash flow optimization.
Financial Analysis:
- Financial Statements: GCC needs to conduct a thorough analysis of its financial statements, including the balance sheet, income statement, and cash flow statement. This analysis should focus on identifying trends in receivables, bad debt expense, and cash flow.
- Ratio Analysis: Key ratios like accounts receivable turnover, days sales outstanding (DSO), and cash conversion cycle can provide insights into the efficiency of GCC's credit and cash flow management.
- Cost Analysis: GCC needs to implement a robust cost accounting system to track the costs associated with managing credit and cash flow. This includes analyzing the cost of bad debt, the cost of financing, and the cost of managing receivables.
Credit Risk Management:
- Credit Policy: GCC needs to review and refine its credit policy, including establishing clear credit limits, implementing a robust credit scoring system, and developing a comprehensive collection process.
- Credit Scoring: Implementing a more sophisticated credit scoring model, incorporating factors like payment history, creditworthiness, and business size, can help GCC better assess the risk of extending credit.
- Collection Process: GCC needs to streamline its collection process, including implementing automated reminders, using collection agencies, and exploring legal options for recovering unpaid receivables.
Cash Flow Optimization:
- Cash Flow Forecasting: GCC needs to develop a robust cash flow forecasting model to predict future cash inflows and outflows, enabling better cash flow planning and management.
- Inventory Management: Optimizing inventory management, reducing unnecessary stock, and implementing a just-in-time inventory system can improve cash flow by reducing the amount of capital tied up in inventory.
- Accounts Payable Management: GCC should negotiate favorable payment terms with suppliers and implement a system for timely payment, optimizing its cash flow.
4. Recommendations
Implement a Robust Credit Risk Management System: GCC should invest in a comprehensive credit risk management system that includes:
- Credit Scoring: Develop a more sophisticated credit scoring model to assess the risk of extending credit to new customers.
- Credit Limits: Establish clear credit limits based on customer risk profiles and payment history.
- Collection Process: Implement a streamlined collection process, including automated reminders, collection agencies, and legal options.
Optimize Cash Flow:
- Cash Flow Forecasting: Develop a detailed cash flow forecasting model to predict future cash inflows and outflows, enabling better cash flow planning and management.
- Working Capital Management: Improve working capital management by optimizing inventory levels, negotiating favorable payment terms with suppliers, and streamlining accounts receivable management.
- Financial Planning: Implement a comprehensive financial planning process to ensure sufficient cash flow to support the company's growth strategy.
Enhance Accounting and Financial Reporting:
- Accounting Procedures: Implement robust accounting procedures, including clear documentation, segregation of duties, and regular internal audits, to ensure accuracy and transparency in financial reporting.
- Financial Analysis: Conduct regular financial analysis, including ratio analysis, variance analysis, and trend analysis, to identify areas for improvement and potential risks.
- Financial Reporting: Improve financial reporting, providing the Board of Directors with timely and relevant information on the company's financial performance and key metrics.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies: The recommendations align with GCC's core competency of selling gift cards and focus on improving the company's financial health to support its growth strategy.
- External Customers: The recommendations are designed to improve GCC's credit policy and collection process, enhancing customer satisfaction and reducing the risk of bad debt.
- Internal Clients: The recommendations provide the Board of Directors with accurate and timely financial information, enabling them to make informed decisions about the company's future.
- Competitors: The recommendations aim to improve GCC's financial performance and competitive position in the gift card market.
- Attractiveness: The recommendations are expected to improve GCC's profitability, reduce its risk exposure, and enhance its overall financial health.
6. Conclusion
By implementing these recommendations, Gift Card Capital can effectively address its credit and cash flow challenges, improve its financial performance, and position itself for continued growth. The company needs to prioritize a comprehensive approach to credit risk management, cash flow optimization, and accounting and financial reporting.
7. Discussion
Alternatives not selected:
- Selling the business: This option would provide immediate cash flow but would mean giving up control and potentially losing the value created by GCC's growth.
- Issuing debt: While this could provide short-term financing, it would increase the company's debt burden and potentially impact its financial flexibility.
Risks and Key Assumptions:
- Economic downturn: A significant economic downturn could impact customer spending and increase the risk of bad debt.
- Competition: Increased competition in the gift card market could put pressure on GCC's pricing and profitability.
- Implementation challenges: Implementing the recommended changes requires significant effort and may face resistance from employees.
8. Next Steps
- Develop a detailed implementation plan: This plan should include specific timelines, responsibilities, and resources for each recommended action.
- Communicate the plan to stakeholders: This includes the Board of Directors, employees, and key customers.
- Monitor progress and make adjustments: Regularly track the implementation of the plan and make necessary adjustments to ensure effectiveness.
- Continuously evaluate and improve: Regularly review the company's credit and cash flow management practices and identify areas for further improvement.
By taking these steps, GCC can effectively address its credit and cash flow challenges and position itself for continued success.
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Case Description
The United States had recently experienced a recession, and a credit analyst with Gift Card Capital Inc. (GCC) needed to financially evaluate two troubled restaurant chains. GCC's unusual business model involved offering capital financing in exchange for gift cards that GCC then offered to individual customers and third-party loyalty programs. The analyst needed to weigh the benefits of increasing the size and diversity of GCC's gift card portfolio against the estimated viability of any gift cards received. It was critical to determine whether the businesses could sustain operations for the gift certificates' redeemable time period-roughly up to five years. The analyst was unsure of what to do. Should he offer a cash advance to one, both, or neither of the firms? If he chose to extend a cash advance, how large should that advance be? What specific terms or conditions should be associated with any cash advance? How were the companies adapting to their financial situation and their past performance? How likely was it that either of the companies would become insolvent and shut down overnight?
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