Finance Why did we get an emergency loan?


You get an emergency loan when you run out of cash. The simulation gives you every benefit of a doubt, but if you are out of cash at the end of the year, Capstone®'s friendly loan shark, "Big Al," arrives to give you just enough cash to bail you out. In general there are three root causes.

  • Inventory that you expected to sell wound up in the warehouse instead. When you signed the check to pay for the inventory, you ran out of cash. About 70% of emergency loans fall into this category.
  • You forgot to fund a major plant improvement. About 25% of emergency loans fall here.
  • Your profits were so negative you exceeded your cash reserves. About 5% of emergency loans fall here.

To diagnose your emergency loan, examine your Cash Flow statement. It represents the net flow of money into and out of your checking account. A positive number indicates an inflow, a negative number an outflow. For example, find the "Inventory" line. If your inventory position increased compared to last year, you had to pay for the additional inventory, and that resulted in a cash outflow. On the other hand, if you sold your entire old inventory, that represented a cash inflow.