Supply Chain Vector [Electronic resources] : Methods for Linking the Execution of Global Business Models With Financial Performance نسخه متنی

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Supply Chain Vector [Electronic resources] : Methods for Linking the Execution of Global Business Models With Financial Performance - نسخه متنی

Daniel L. Gardner

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Cash Flow From Operating Activities

Net income, the first item in the operating activities section shown in Table 16.1, summarizes all of NikoTech's revenue- and cost-related initiatives for Y2. At $12.6 million, Y2 performance came in well below expectations and 50% below the previous year's number. Recognizing net income as the only consistent source of cash for a company and that current asset performance was dysfunctional, NikoTech will be challenged to make up for its slow start.



Table 16.1: NikoTech Cash Flow Statement Operating Activities


































in Millions


Operating Activities


Net Income


$12.6


Depreciation


$36


Increase in Accounts Receivable


($165)


Increase in Accounts Payable


$75


Increase in Other Payables


$29.4


Increase in Inventories


($180)


Cash from Operating Activities


($192)


One boost that this section will feel is the "add back" from depreciation. Because depreciation does not represent an additional out-of-pocket expense in the period considered, but rather the matching of costs with revenue in the proper periods, depreciation is always added back as a source of cash in the CFS. With $36 million in depreciation, every little bit helps.

Unfortunately, the remainder of the operating section did not do a lot to enhance NikoTech's cash position. Looking first at accounts receivable, this line item grew from Y1 to Y2 by $165 million (from $285 million to $450 million), a use of cash. Moving on to inventories, the increase was even greater, appearing as a $180 million use of cash (from $480 million to $660 million). Even without considering the consumption of funds related to investing and financing activities, NikoTech already shows a negative cash flow of $296.4 million.

At this juncture, the only hope for the operating section is a compensatory increase from accounts payable and other payables. Although the two items combined did show a source of cash of $104.4 million ($75 million plus $29.4 million), it was not nearly enough to net out the impact of accounts receivable and inventories. After accounting for changes in each item, cash flow from operating activities registered a net use of cash of $192 million.

The analyst's wholesale acceptance of this number would leave some potentially instructive insights unchallenged. For example, a large increase in NikoTech's sales may precipitate a commensurate upward tick in both receivables and inventories. As such, in a growth mode, how can a negative number possibly be avoided in the operating section?

Although there may be some truth to this hypothesis, the point can be countered with at least three arguments. First, this rationale assumes that accounts receivable and inventories were at reasonable levels in periods prior to Y2, an enviable scenario that was not the case at NikoTech. The current asset issue did not just surface out of the blue in Y2; it had been building momentum for quite some time. Second, if indeed sales were growing, it would be sound to assume that net income would grow as well, thus augmenting the cash flow figure. As observed, net income dropped by 50% from Y1 to Y2, a trend that does not bode well for the CFS in the future.

Finally, and this point has already been made, if sales are growing, raw materials purchases must be growing too. Logically, this dynamic would precipitate an increase in payables and serve as a source of cash on the CFS. In the NikoTech analysis, total current liabilities did increase by $104.4 million, but the question remains as to whether that number could have been higher. This scenario was analyzed in considerable detail during the discussion on supply chain velocity and asset utilization, with the determination that the entire supplier management program needed revamping.

For purposes of the CFS, if NikoTech rationalized the spread of its payables (i.e., pay old debts), the short-term effects would appear to be harmful, but in future periods the organization would be in a better position to negotiate more reasonable terms and allow for an increase in payables that is more consistent with recent purchase levels. The only difference would be that the growth would be found in the 0- to 60-days sections and not over 60 days. This growth in accounts payable as a function of sales would increase accounts payable in a manner greater than what was observed in Y2, creating a source of cash more consistent with the reality of the operating environment.

If an analyst only studies the period under consideration, results from the section on cash flow from operating activities may distort the future prospects of an organization. With this short-term view in mind, the combination of net income, depreciation and changes in working capital completes the marriage between the income statement and balance sheet. As was the case in NikoTech's balance sheet and fixed assets analysis, however, a longer view of the future of a company must be taken via study of the investing and financing section of the CFS.

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