Andre's Auto

Andre’s company was well placed with an increasing demand for automotive parts in the market, his expertise in the field and the contacts he had built while he worked as a technician.He had timed the expansion well and there seemed to be a good prospect for growth.

As with any expansion activity there has to be a proportional usage of two kinds of funds - internally generated funds and externally generated funds. While utilizing external funds has it’s own advantages such as tax benefits it can place a company in a state of financial risk and vulnerability as they are seen as debts on the balance sheets of the company. Theoretically borrowing is good as it induces tax benefits but the risk it brings can ward off suppliers and investors.

Andre had used up most of his internally generated funds to setup his firm and knew that he had to rely on external funds to grow and sustain but could not explain this as he was inexperienced at finance. His friend Tom suggests him to hire an MBA graduate who can look into the problem with a different perspective and make it clear to the suppliers and investors that his company was not necessarily in a position of financial risk as there was a potential to grow. This could be implied by analyzing the ratios of the company and using the Z formula to show that the company was not moving towards bankruptcy.

The second case is about Quick fix Auto Parts, a company that Andre Pires had

started owing to his experience as a technician and his expertise in the field.

Andre had built strong connections and perceived that the industry had an

increasing demand. He was confident about the future sales of his company

even among fierce competition. This shows that the company had potential to

grow even if it was currently in a position of financial risk.

Andre had used up most of the money that he generated internally to setup his

store and acquire supplies. His expansion plans could be fulfilled only by

borrowing external capital in the form of loans. Theoretically it is safe and in

fact good for a company to borrow external money as it provides tax benefits

but it is also important to have a healthy share of internal funds in the form of

liquid cash balances as the company enters into a state of financial risk if it

borrows too much money. He is anxious as his suppliers and investors will see

this as a reason for pulling out of his company.