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

Cash Flow From Investing Activities

As one gets further removed from the operating activities of a company, it may seem that the links between financial considerations and supply chain execution diminish proportionately. Actually, because of the relationship between execution and outcome, as well as the fact that future investments are partially driven by bottom line results, the need to tie performance to strategic decisions is indeed important. The cash flow from investing activities section of the CFS opens a window into this long-term component of supply chain management while also considering the short-term impact on cash of longer term investments. It is the combination of performance from the operating section with strategic moves in the investing section that creates the proper perspective for businesspeople and allows them to take a view beyond the next quarter.

Analysis of the cash flow from investing activities section should be made within the context of the evolution of the company under analysis. NikoTech has been in business for close to two decades, but, more relevant for the analyst's purposes, the company has undergone a fairly strong growth trend in the last couple of years. For this reason, investments or divestitures by the company should be studied with an eye toward future trends in contract manufacturing, general growth of the industry and, most importantly, growth prospects for NikoTech itself.

Even with the downward spiral in high-tech and telecommunications volumes, all indications are that the traditional original equipment manufacturers and new market entrants will continue to outsource engineering, prototyping and manufacturing services for the foreseeable future. Within that macro-growth trend it appears that NikoTech will continue to enjoy similar if not greater growth to the extent that it can meet the needs of its clients. Although obvious to insiders that management has to get its house in order, from an external perspective NikoTech's prospects for the future are still positive. It is within this context, and against the backdrop of short-term financial realities, that NikoTech's strategic decisions must be made. A summary of NikoTech's investing activities in Y2 is provided in Table 16.2.

Table 16.2: NikoTech Cash Flow Statement Investing Activities

As first observed during the balance sheet analysis of fixed assets, there was not an overabundance of activities in this area in Y2. The decision of management to limit investments in plant and equipment has both short- and long-term consequences for the company, but for purposes of the Y2 CFS, it represents a use of cash of $60 million. It is interesting to note the relationship between this expenditure and what actually appears on the balance sheet in plant and equipment. The actual value in plant and equipment only increased by $24 million, from $540 million to $564 million, a figure that may be a source of confusion when compared with the investment of $60 million noted on the CFS.

The net increase on the balance sheet was only $24 million due to the $36 million in depreciation that was deducted from asset values and shown as an expense on the income statement in Y2. This point completes the loop in the depreciation discussion, as its $36 million value was added back as a source of cash in the operating section of the CFS. To repeat, depreciation is a source of cash, and although netted out of asset values, it is always added back as a source of cash in the period it was expensed.

It could be argued that with the sales growth that NikoTech has experienced, a $60 million investment in plant and equipment does not pave the road for future development. In an organization that was operationally well disciplined, this statement would certainly have merit. However, in the case of NikoTech, a company that is off course in the fundamental management of almost all of its operations, perhaps it would be a better idea to get a handle on what it has before setting out on further expansionary expeditions. Starting with its forecasts, which must be conducted in a much more collaborative manner, management must reconcile production planning with capacity planning and ultimately materials requirements planning with the raw materials in-house today.

On the customer side of the equation, management needs to develop client-specific profit-and-loss statements that allow the program managers to operate individual contracts as if they were discrete businesses, which is, after all, what they are. Translated into layman's terms, NikoTech has to focus on making the business it has in-house profitable before it can seriously think about the prospects of future expansion. Growth for the sake of growth can be a dangerous proposition, a situation clearly manifested in the NikoTech analysis.

Given the relentless siren of Wall Street and its demand for compound sales growth, this may be a difficult pill for NikoTech to swallow. The question then becomes whether or not the company was better off in Y1 with net income of $25.2 million on $1.440 billion in sales than it was in Y2 when it achieved sales of $1.698 billion but earnings of only $12.6 million. Given the rudderless ship that was NikoTech in Y2, perhaps the $60 million investment could have been postponed or reduced while management regained control of the operation. Although hindsight is always 20/20, this decision would have helped the CFS in the short term.

To close out the discussion on the investing section of the CFS, note the $15 million in sales of marketable securities. Defined as ownership of stock in other companies, this sale could have been precipitated for a variety of reasons. Because cash on the balance sheet was depleted in Y2, this sale may have been intended to back up future cash outlays. It also could have been that it was simply the right time to unload those stocks. In order to get to the bottom of this particular case, one would have to dig deeper than the information provided on the balance sheet allows. Regardless of the inspiration for the sale, the period-specific impact was to provide NikoTech with a $15 million source of cash, a small offset to the expenditures thus far itemized.