The Nelson Company has $1,250,000 in current assets and $500,000 in current liabilities. Its initial inventory level is $400,000, and it will raise funds as additional notes payable and use them to increase inventory. How much can Nelson’s short-term debt (notes payable) increase without pushing its current ratio below 1.7? 

In order for Nelson’s current ratio to remain at or above 1.7, its total current assets must be greater than or equal to 1.7 times its total current liabilities. Therefore, in order for Nelson’s short-term debt (notes payable) to increase without pushing its current ratio below 1.7, the notes payable must not exceed $650,000 ($1,250,000 – $500,000 + $400,000 = $1,150,000; $1,150 000 / 1.7 = 676 500). Nelson is only allowed to increase its note payable by a maximum of $650,000.

The company should consider the future consequences of increasing its short-term debt, as it can negatively impact the health of their finances over time because of increased interest costs etc.

Using special financing offered by government agencies, banks and other organisations that can provide lower interest rates or longer repayment periods with less strict requirements would prove to be a valuable asset in any situation.