Question

MAC, LLC, reported the following data in its August 31 annual report. Cash and Cash equivalents...

MAC, LLC, reported the following data in its August 31 annual report.

Cash and Cash equivalents $485,625

Cash flow from operations (630,000)

(a) What is the company's "Cash burn" per month

(b) What is the company's ratio to cash to monthly cash expenses

(c) Interpret the ratio you computed in (b)

What are the implications for the company

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Answer #1

1) Cash burn means negative cash flows (i.e. $630,000 in the given case). It represent net cash paid during the year.

Cash burn per month = Total cash flow from operations/Total months in a year

= $630,000/12 months = $52,500 per month

Therefore the company's cash burn per month is $52,500.

2) Ratio to cash to monthly cash expenses = Cash and Cash Equivalents/Cash expenses per month

= $485,625/$52,500 = 9.25

Therefore the company's ratio to cash to monthly cash expenses is 9.25.

3) The ratio of cash to monthly cash expenses indicate that company can cover its cash expenses for a period of 9.25 months from the cash balance available on August 31 annual report. It indicates that the company will run out of cash in 9.25 months if any other financing is not implemented for increasing cash balance.

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