As an IT strategist/Enterprise architect in a corporate America, understanding the cash position and cash flow prediction enables to align the IT strategy to support the over all business strategy. Generally, the business strategy, cash position and cash flow position are provided to IT from controlling or corporate finance or business strategy team.

I wondered, how difficult to study survivability, sustainability, stability of a captive finance and came up with a simple model. The model is broken into sub model and the attachment provides the details on the first sub model. The sub model provides the projection of available fund, accounts payable and accounts receivables.

Please click the excel to view the raw data of the model. Please go to “Results” tab to see the projection of the account’s portfolio.  The excel can also be downloaded from google doc. (Few columns were hidden just to ensure the better reporting)

In  scenario #1, the cash and fund flow of the captive company is shown.  If the general administration cost of the company is 1% of its accounts receivable, then company is not going to sustain in next 36 months for the given initial condition (accounts payable and recivable).  The payables are increasing, receivables are decreasing and fund reaches near equilibrium (steady state). This company will not survive in long run unless the G&A is reduced significantly.

In simple words, the company is spending too much of cash in administrating the loan portfolio. Company must quickly react and for a captial investment company, the company is not attractive unless investment company is an expert in reducing and managing G&A and use this projection as a good negogiation tactics for best bargain. 

In scenario #2, the operating loss of the company is 1% of accounts receivable. There is no HOPE for the captive finance company in scenario #2. The net loss of the company is increasing expoentially. Atleast in scenario #1, there was a hope. The company will incur losses only after 12 months and it can be turned around if the company quickly react to it.

Capital Investment company should not consider the company in scenario #2. The company already bought too many bad papers and it can not be reversed.  It is unmanagable risk unless the external factors like economical growth minimizes the credit losses and residual risk. A miracle need to happen for this company in scenario #2 to survive.

In scenario #3,  the company is paying the debts  aggressively. Company is not circulating the money to offer new loans. The company has a very strong balance sheet. If the company is planning to put themself for a sale, this approach given in the scenario #3 will attract more captial investment companies. For the captial investment companies, the company sits on high equity and steady fund flow. This is a good scenario if the company decideds to shut down (or run down) the business in next 36 months and make huge profit. If you are an employee and if you work for the company in scenario #3, better you float your resume since the company will close the doors after 36 months after making huge profit. There is no investment made in this scenario #3 for growth.

In scenario #4,  the company has very low operating losses, manageble operating expenses (G&A) and has a right mix of investment and payback strategy for both future and debt holders.  The company will be making profit for next 36 months and if the trend continues, the company will be in business for long time.  If you are employee working for this company, make more retirement investment with company’s option/plan. If you are captial investment company, buy this company to thrive. This scenario is a win-win scenario for all stakeholders, investors, management, employees, debt holders.

Auto finance is almost a trilion dollar industry. I believe the companies will be interested to buy a software to study the company status in long run given current situation and various scenarios.

Please post your suggestion on developing a software for this purpose will have scope in auto finance industry market..