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After reading your report, as well as comments by others on the team, the Genesis Energy team began to understand the importance of cash flow and financing in high-growth scenarios. The Genesis Energy accountant suggested that the focus should be on developing a financial strategy that would ensure operational needs are met through short-term financing. The Genesis Energy team instructed Sensible Essentials to explain in basic terms the factors and mechanics necessary to determine short-term financing needs. As the finance expert for Sensible Essentials, do the following:
- Explain the concept of working capital and its importance to Genesis Energy.
- Describe the mechanism and methodology used to ensure that operational needs are met through short-term financing. Explain why this methodology is important to Genesis Energy.
- Explain how working capital represents the assets that are needed to carry out the day-to-day operation and how working capital can act as a source of financing or increase the need for financing.
In your response, be sure to consider the time value of money and the relative advantages and disadvantages of short-term loans versus internally generated funds.