How does borrowing $1 million short term and investing the proceeds in inventory affect cash and net working capital?
To determine how borrowing $1 million short term and investing the proceeds in inventory affects cash and net working capital, you need to consider two main factors: cash flow and the impact on working capital.
1. Cash Flow: When you borrow $1 million and invest it in inventory, your cash position will increase by $1 million due to the loan proceeds. This means that you have additional funds available to use for various purposes.
2. Working Capital: Working capital refers to the difference between current assets (such as inventory) and current liabilities (such as short-term debt). By investing the borrowed money in inventory, you are increasing your current asset balance. Assuming there are no changes to your current liabilities, this will increase your net working capital.
However, it's important to note that the impact on cash and net working capital can be influenced by other factors:
a) Loan repayment: Depending on the terms of the loan, you will have to repay the borrowed amount along with any accrued interest. If the repayment occurs within the short term, it will decrease your cash balance and may reduce your net working capital.
b) Inventory management: The effectiveness of managing your inventory will impact your cash and net working capital. If your inventory maintains a good turnover rate and you are able to sell it profitably, it will positively impact your cash flow. However, holding excessive inventory or facing difficulties in converting it into cash can create negative effects.
In summary, borrowing $1 million short term and investing the proceeds in inventory will increase your cash balance initially and also increase your net working capital. However, the impact on cash and net working capital can fluctuate depending on factors like loan repayment and inventory management.