In this post I am going to write about Emergency Loan – thing that scare every team and will severely hurt your score in this MBA simulation.
Emergency loan in Capsim is the Short-term loan that you have to borrow in a round due to the shortage of money. And like the short term borrowing your team will have to pay it back in the next round. So think of this: If you have an Emergency loan in this round and you do not know how to improve the cash flow, it is very likely that your team will have emergency loan in the next round. I have seen a lot of teams got panic after this and they made even bigger mistake.
From my experience, one common reason for Emergency loan could be excessive Inventory – which come from some wrong R&D decisions or wrong Forecasting (that’s why in my R&D Strategy in Capsim posts I told you to read the Industry Condition Report very carefully). Either producing too much or your sensors getting out of the Customers’ Buying Criteria could lead to high Inventory costs.
The second reason is bad Cash flow, in the first three rounds you will need a huge amount of money for investments such as capacity, automation level, designing new products, and marketing campaign. Actually, excessive Inventory causes bad Cash flow too because Inventory is deducted from Cash flow from operating activities. See the picture below for more information. Digby had a negative Net cash from operations of $8 million with a negative $13 million from Inventory (but it shows $8k and $13k)
Andrews, Baldwin, Digby all had negative Cash flow and 5 out of 6 teams got Emergency loan since they did not have enough cash as of December 31.
So, as you can see Ferris had a Negative Cash flow but how did they not get the Emergency loan? It was because their Cash account in Balance sheet was $27 million after the deduction (the red circle). It means they had plenty of cash and I’m pretty sure that they did not need to worry about a Negative cash flow.
I will analyze the next round (Round 4) as well so you guys will have a better idea of what I’m talking about:
We can see some improvements of cash flow in this round but Digby and Baldwin were still in trouble.
– Chester, Erie and Ferris cleared their inventory and got positive cash flow from Inventory (the red arrows).
– Chester sold their capacity to have more cash – the red underline. This was not really “improvement”, they got cash for this round but it would be bad for the next rounds since you can only get 65% of your money back when selling capacity. So, if it was not super urgent, I would never suggest selling capacity. You can have better solution for your cash flow. However, Chester got cash and their cash position will be okay for the next round.
– Andrews borrowed more long-term debt and issued common stocks – very wise solution here. They could pay off the debt while still had cash.
– Digby got even more Inventory costs of $13 million and they had to pay off short term debt (Emergency loan from last round). As a result, they got another Emergency loan for this round.
If you want to improve your financial ratios and avoid Emergency loan , here are some advice:
– R&D your products with the right specifications and forecast your sales to minimize the inventory, which will lower the cost of inventory
– Try not to borrow short-term loan, but borrow long-term money and issue stocks instead
– Always check your Finance tabs, if you see the negative Year-end cash, your team need more cash, either by lower the expenses or borrow money or issue stocks. However, the year-end cash in Finance tab is just a forecasted number, if you know what you are doing, a few negative million would not be a problem. For those who do not have any idea how it works, make sure you have at least 5-10 million in cash left at the end of the year.
– Leverage ratio – a super important ratio that affects your Balanced Scorecard – should be around 2.0 to 2.4.