Working Capital Management Essay
Working Capital Management
Finagle A Bagel was purchased in 1998 by Alan Litchman and his wife Laura Trust. At the time Finagle had been in operation for 4 years and operated out of 4 locations. Having come from a corporate background with no bagel baking experience, Alan and Laura faced with many financial and operations decisions with their purchase. Situations such as renting a facility or owning it, incurring debt or partnering with a venture capitalist, building banking relationships, opening lines of credit, and establishing trade credit. Each of these decisions effected if Finagle was in the red or black. Many small companies are faced with similar decisions, determining if the cost is justified and the potential return. When Alan and Laura purchase Finagle, they determined that they wanted to own their facilities, arguing that in the long term it is better to own then rent. This was very advantageous for Finagle as it put them in a position to negotiate with banks when the economy declined.
Finagle built partnerships with banks as they were seen as a good investment to the banks, this in turn meant lower interest rates to finance their debt. Early on Finagle had the opportunity to take on partners as a means to raise capital, but they decided instead to take on debt which allowed them to continue to operate their business without oversight. Venture capital partners could have enabled Finagle to grow faster without debt but it could have cost them control over the long term direction they saw for Finagle. As with any business, a good accounting department is necessary. Determining if spending justifies the cost, for Finagle they recognized that they need to spend $10,000 to earn $1,000; as a majority of the profit went to overhead such as electricity and personnel. Understanding the cost of spending enabled the company to be competitive in the marketplace and position themselves for the long-term. Small retail operations see cash daily through individual purchases.
Cash in hand adds surplus to the bottom line as Finagle is seeing immediate payment but has 20 days before they have to pay their vendors. When Finagle started to grow and place their products in grocery stores, they were no longer receiving payment for their goods immediately. The grocery store would provide payment within a stated period of time however Finagle could not delay paying their vendors until they received payment from the grocery store. To combat the time delay between accounts receivable and accounts payable, Finagle opened a line of credit and negotiated the use of trade credit with their vendors. Having multiple means to service their debt has helped Finagle a Bagel to grow into a successful organization. Through strong leadership and working capital management, Finagle has grown to have 5 retail locations, partnerships with 26 grocery stores that stock fresh and frozen bagels, and 12 distributors (Finagle A Bagel, 2014).
Finagle A Bagel. (2014). Where to Buy. Retrieved from http://www.finagleabagel.com/where-to-buy.aspx#!cafe-locations Parrino, R., Kidwell, D., & Bates, T. (2012). Fundamentals of Corporate Finance (2nd ed.). Hoboken, NJ: John Wiley & Sons.