How to manage emergency loan in capsim? five different ways to avoid it

What is an Emergency Loan?

It is very important for all the participating companies in Capsim to manage their Cash flows very well to avoid any kind of Emergency Loan. If any company in Capsim doesn’t have adequate Capital to manage its all operations, automatically emergency loan is taken by the company to manage its operations smoothly. So, an Automatic loan taken in Capsim is Called an Emergency Loan.

There are so many options for the companies to take Capital or cash. Either Company can go with the equity option, in which they issue the shares or they take the Loan which can be short-term or long term and they have to pay fixed interest on it.

How Emergency loan is treated in Capsim?

An emergency loan is automatically taken when you make bad decisions in your Capsim, and for smooth operations, the automatic loan is taken, which is called the Emergency loan. One can check the information about the emergency loan on the first page of the Courier or FastTrack. An emergency loan is treated as a short term loan with a 7.5% premium which is paid for. If any company emergency loan amount exceeds 10 million, it shows a serious problem in company performance. In contrast, small loans are not a big problem.

Why Emergency loan is needed by any Company and how to avoid it?

There are so many problems that may lead to an Emergency Loan situation for any company for example:

1) Excess Inventory: If a company produces excess inventory and is unable to sell it to clients, it shows the company has stuck so much money in the inventory and it is not liquid and you may face an emergency loan problem.

Solution: if the company has already inventory, it is better to produce less amount of units. It will help the company to manage cash flow easily.

2) Sales Forecast problem: if you don’t sell all the units, that you have forecasted and produced accordingly, you will face an emergency loan situation. So, it is important to have a strict sales forecast for your products.

Solution: It is critical for the companies to forecast the sales in the next round, it will help them in producing the required units and the company doesn’t have the unsold inventory and the cash amount will not stuck.

3) Buying Extra Production Capacity for the Next Round: Sometimes, companies have outperformed products and in order to manage next-round demand, companies try to buy more production capacity for the product but sometimes it causes problems, if it doesn’t go as planned.

Solution: It is good to have confidence in your product but in the hope of selling more units in the market, don’t buy extra production capacity for the product, it is very expensive and takes lots of cash. It may cause a serious problem of shortage of cash and result into getting an emergency loan.

4) Huge investment in Automation: Sometimes, companies want to take advantage of their competitors by inducting a high amount of investment in Technology and Production automation.

Solution: There is no doubt, that automation is very important but, if sometimes, a company has a bad cash position, you can avoid a high automation level and reduce it to manage cash.

5)More days to Account Receivables: If companies in Capsim, have a bad cash situation, they must check their account receivable Days. Account receivables must align with the account payable days. For example, if a company clears its account payables in 30 days and its Account receivables pay in 40 days. This situation will create a shortage of cash and, you may need an emergency loan.

Solution: for proper cash management, it is important to manage accounts receivable and accounts payable on equal days for smooth cash operations. If possible, you can delay account payable to a few more days to have cash in your account for more days.

Lastly, In CapSim, avoiding emergency loans is crucial to financial stability and firm performance. Overspending, low sales, and excessive fixed costs might lead to emergency loans. These CapSim tactics will help you avoid emergency loans:

If you want to understand in more depth about the Emergency loan, contact our Capsim Tutor for your great understanding and guidance.