Linbarger faces liquidity problems as their current assets cannot sufficiently meet their current liabilities. As at 30 th June, they have cash amounting to$80,000 while their liability obligations require at least $200,000.This gives a difference of $120,000 which must be balanced for them not to be closed down by their insurer. According to their agreement, they are to maintain at least $200,000 in their cash balances. A company that can balance such that the liquidity ratio is above 1.0 will remain operational since it is able to meet all the current expenses and liabilities that are recurrent. For the case of Linbarger, the liquidity ratio has fallen below 1.0; this has presented a worst case scenario and has put the company in problems with the insurance company.
In the case of Linbarger limited, there are several ethical considerations with the request made by Lisa, Lisa requests an additional one day to affect the $150, 000 payments by the Oconto distributors. This would fall into another financial period which is not the balance for the time required. This is fraud in the financial books with the objective of meeting the requirements of the insurance company. The financial fraud committed by the company with the objective of making the company continues operating and the employees to continue their jobs. In accounting, fraud is abhorred. Lisa has perpetuated the fraud by manipulating the cash balance of Linbarger during the period ending 30 th June in order to keep their jobs is not ethical and not acceptable.
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The recommendations by Lisa to backdate the payments by Oconto distributors are unethical in its sense. Backdating the balances by one day would mean that the company goes out of its way to balance the financial books with the intention of satisfying the insurance company (Choi & Pritchard, 2018). The start of the subsequent period in July would also be impacted given the fact that already $150, 000 has been given to the previous account. At a personal level, it is professionally unethical to alter the books of accounts with the objective of protecting the individual jobs. Even though the observation of Lisa is right but it is not up to her to recommend alterations based on the loss of jobs. The company is also operating below the required liquidity ratio which it should operate. Any company should be able to operate in a state where it is able to meet all the expenses from its cash. The requirement is to avoid the liquidity problems that may arise from the operations of the business (Chen, Cui, He & Milbradt, 2017).
There are several things that can results if Lisa’s instructions are ignored. The company risks closure and auction of the company properties. This would be the worst-case scenario in which the insurance company can auction the properties of the company to recover and service their loans that they advanced to the company. In this case, all employees of the company would lose their jobs. In other cases, the insurance company may put Linbarger under receivership. In this case, there is a takeover by other companies and individuals which are able to service the loan by the company. The new companies will then acquire significant stakes in Linbarger limited. The new owners may then make radical changes that affect the management of the company. Whichever happens in as a result of default the employees will be affected directly and employees would lose their jobs.
The people who would lose should there be a recorded default by the insurance company include the shareholders of the company, the employees of the company, and customers of the company. The shareholders are the owners of the company would lose their investments to the insurance company, the employees would lose their jobs from the actions taken by the insurance company, and the customers of the company would also lose owing to the closure and takeover of the company. The company would suffer goodwill and reputational damage from the cases and the publicity that the cases would generate. Whichever decision is made by the insurance company on the company due to the default of the loan the impact would fall on the two categories of stakeholders being primary stakeholders and secondary stakeholders.
In order to move out of the situation, the company must first build its financial base in form of cash. Some of the fixed assets of the company must be turned into cash (Brooks, 2015). Turning the fixed assets like machinery, land, and equipment to cash would improve the liquid cash of the company which in turns raises the liquidity ratio of the company. The company must also introduce a policy that encourages cash transactions to their customers. A transaction policy which states that any sales made must be paid by 50% cash and 50% check while discouraging credits sales. This will play in raising the quick ratio and enabling operations of the business. The impacts could have a long-term effect on the future operations of the business. The recommendation of disposing off the fixed asset of the company works in the short-term realization of liquidity ratio to salvage the situation while the long-term solution is effectuation of the policy of non-credit and partial cash. Reduction on the expenses is also an essential method of reducing the current expenses while maintaining the current assets. The immediate measures work by avoiding the imminent foreclosure of the company.
References
Brooks, R. (2015). Financial management: core concepts. Pearson.
Chen, H., Cui, R., He, Z., & Milbradt, K. (2017). Quantifying liquidity and default risks of corporate bonds over the business cycle. The Review of Financial Studies, 31(3), 852-897.
Choi, S. J., & Pritchard, A. C. (2018). Securities law and its enforcers. In Research Handbook on Corporate Crime and Financial Misdealing. Edward Elgar Publishing.
