Cape Chemical Case: Cash and Profits

Throughout history, the business community doesn’t necessarily think of a chemical, wholesale distributor, as having the ability to reach double-digit growth rates, all while revolutionizing the distribution process. But that is exactly what Cape Chemical has done. By offering “next day delivery,” the company was able to differentiate itself from its competitors and gain a significantly larger market share than those same adversaries. But with the new increase in demand, a lack of borrowing power, a very “loose” accounts payable collection system and a growing inventory pool, Cape Chemical ran into cash flow issues. Since they are running into cash flow issues now, even with double-digit growth
As the company continues to grow, and if they continue to have a payment system that is basically dictated by its customers and inventory that grows at a rate of 50 percent per year, they will be forced to begin cutting costs elsewhere. This cost cutting can start with their cost of goods sold and selling expenses, which in their case, are variable costs. Cape Chemical would have to begin cutting wages; find cheaper materials to use or even lower the marketing budgets of its products. Most importantly and an area that would be most detrimental, would be that the company stop promising next day delivery to its customers. With no cash to buy products or pay its employees, Cape Chemical would have no choice but to eliminate the one thing that allows them to grow at unheard of rates. Since this is a last resort measure, the company will already have seen growth slow, and customers will have already started looking at competitors. By looking at Figure 3, you can see that cash flow will increase rather significantly almost instantly. But you will also notice that because they have begun cutting costs, the growth rate has slowed accordingly. I recommend that Cape Chemical organizes and executes a plan based around a combination of scenarios one and two, to fix its’ cash flow deficits. Scenario one being, that the company begins the process of meeting with its’ customers and arranging for a new payment system in