SMITH FAMILY FINANCIAL PLANNING Harvard Case Solution & Analysis

SMITH FAMILY financial planning Case Solution

Introduction

The Smith family has been in the cash crunch because the family’s cash outflows are more than cash inflows. Since both husband and wife have combined annual income of $80,000 pretax. However, there expense are increasing rapidly, and they use acredit card that at the end of month incur huge interest expense. Meanwhile, in this situation, the family could not understand how their future planning should be, and how their future goals could be achieved in given situations, where their expenses are over their income level.

Critical Success Factors

The family has been under the cash crunch, the reason is that their expensesare not controlled. Indeed their expenses exceed the income they have. On the other hand, they use the credit card when they are out of money, and at the end the family ends up with a huge liability of interest payment on the credit card payment. Similarly, the family had no planning about how they should drive their expenses daily, and they had no goals and budget system at all.

Furthermore, the family had been using most of theincome in expenses, and it also has created many liabilities over them, whereas their home mortgages, their car is mortgaged, and they also have insurance planning is over the house and the cars. Therefore, from the situation, it is understood that controlling expenses is critical success factor one, and planning, budgetingare the second factor, and thethird factor is making assets rather than liabilities.

Furthermore, increasing financial complexities has emphasized on managing the assets and liabilities. Therefore, these three factors Control expenses, planning and budgeting, and creating assets. These are critical success factors for the family. However, thiscreates assets rather than liabilities refers to the investment. On the hand, the family has been suffering the huge crisis, because it has frequently been relaying on the credit card as month approach to mid.

Problem Statement

How Smith family could achieve their goals in given cash crunch situation.In given situation,the family is under short, and ends up with huge interest payment on the credit card.That has many liabilities over.

Analysis

Balance Sheet and Income Statement

Smith’s family has huge liabilities whereas they had purchased the home on mortgage, and a car as well. However, indeed, thevalue of assets is more than the liabilities. See Exhibit 1 that shows the assets and liabilities owned by the Smith family. However, if we analyze the situation, then it can be determined that Amber and Joel has $850 cash in hand, and bank balance of $1,300 with a saving of $2,200 only.

Furthermore, the Smith family is engaged in the mortgage loan in thehouse and car loan as well. On the other hand, it also has the credit card loan of $5,800. Thismeans if the banksask for the credit card payment, and Joel would not be able to pay the amount of the credit card payment. Therefore, Joel and Amber are out of capital, which means they would not be able to meet their daily expenses.

Then, they would have single option to use their credit that incurs huge interest rate on average of 21%. That is hugerate. Indeed, at the end of year or month family pays interest rate payment, and could set off the debt.It goes out control, and credit card debt is compounded monthly, that increases the interest rate payments for the card holders.

Meanwhile, the Smith’s family hasa good net worth of $173,626 that means that if family set off all its liabilities, then it would have good net worth amount in hand. However, it is determined that Amber and Joel not be managing their cash needs for thewhole month, that create problems for them at the end of themonth and incurs huge interest expense as well.

Consequently, thefamily would only pay the interest rate payment on the credit card, and would not be able to pay the principle. However, Smith family is also suffering from the same situation, because on one hand family needs money at the end of themonth or mid of month for the daily wages and expenses to continue thehousehold and other expenses.

So, they use their credit card for wages and expenses, and at the end of themonth they could not pay back the payment, and interest rate applied is compounded monthly, that increases the interest rate expense for the Smith family. Indeed, the family on average pays $2,088 in credit card payments. This is ahuge amount for the family to expense, whereas this amount could be used for the investment purposes.

On the other hand, the family is under the many liabilities one car loan of the Amber’s which was mortgaged at $18,000 and remains $13,500 that is being paid annually $520, and it also pays house mortgage payment of $877. Furthermore, if sum up the all fixed spending that Smith family has to pay every month is around $1,602.

Meanwhile, the earnings of the family are $4,800 per month for the husband and wife. Consequently, the other expenses are almost variable and could be reduced or could be eliminated.For example the utility expenses, groceries, telephone, mobile bills, car expenses and restaurant expenses.

Similarly, these expenses could be reduced, but not necessary to reduce all, at least the restaurant's expenses could be eliminated, and credit card expenses could also be eliminatedcompletely. Meanwhile, some other expenses could be reduced so that family could save some money, and avoid cash crunch.

SMITH FAMILY FINANCIAL PLANNING Harvard Case Solution & Analysis

 

 

Similarly, the cash crunch would make a family trap into the credit card payments, and it would need money for expenses, and they would use the credit card payments. However, if we analyze the current situation of the family, then the family is currently on the cash deficit in a given month, and it is in a deficit of $-536. So, in this situation family would need some cash in hand to manage the daily expenses.....................

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