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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The Balance Sheet, Income Statement and Cash Flow Statement

Organizations that are committed to the SCM philosophy must also address the challenge of creating a financial orientation in all of their employees. Whether an individual works in purchasing, manufacturing, sales or information technology, corporate culture should emphasize finance and accounting as a required component of every employee's portfolio of knowledge.

Today's successful businessperson not only has expertise in his or her particular discipline but also general management skills that are built upon an understanding of how to interpret and act upon what financial statements reveal. An understanding of the cause-and-effect activities that are behind the results found on the income statement, balance sheet and cash flow statement goes a long way in establishing the desired perspective and corporate culture necessary for success in today's international milieu. Returning to a point made earlier, when employees operate out on the margin, margin is a lot easier to understand.

As shown in Figure 10.1, the income statement measures profitability over a specific period of time, itemizing revenues and expenses to arrive at a net profit figure for the time frame under consideration. Given that it gauges sales, returns and allowances, cost of goods sold, as well as general, sales and administrative expenses, the income statement begins to reveal the period-specific impact of supply chain activities from both a sales and cost viewpoint. When properly analyzed, the income statement exposes a great deal about how revenues are generated, what constitutes the real cost of manufacturing and how indirect costs can either bolster or erode operating income.


Sales Returns and Allowances

Net Sales

Cost of Goods Sold

Gross Profit

Operating Expenses

General, Sales and Administrative


Nonoperating Income


Interest Expense

Income Before Taxes

Income Taxes

Net Income

Figure 10.1: Income Statement

Portrayed in Figure 10.2 as a snapshot of a company's financial condition at a given moment in time, the balance sheet is critical to understanding supply chain performance for two reasons. First, the balance sheet records changes in assets and liabilities based in part on the activities detailed on the income statement. How a company incurs liabilities as a result of investing in both current and long-term assets can be traced through the balance sheet in the form of cash, inventories, accounts receivable, plant and equipment, accounts payable and long-term liabilities. Understanding the relationship between these balance sheet items and how they are ultimately transformed into cash is necessary to understand the quantitative component of SCM.


Current Assets


Marketable Securities

Accounts Receivable


Total Current Assets

Fixed Assets

Plant and Equipment

Total Assets


Current Liabilities

Accounts Payable

Other Current Liabilities

Total Current Liabilities

Long-Term Debt

Total Liabilities

Stockholders' Equity

Common Stock

Retained Earnings

Total Stockholders' Equity

Total Liability and Stockholders' Equity

Figure 10.2: Balance Sheet

Because the balance sheet itemizes assets and liabilities, it allows for the calculation of vital information related to a company's liquidity, solvency, return on assets and, to a large degree, return on investment and return on equity. The active management of both short- and long-term assets/liabilities is fundamental to comprehensive SCM, as it offers a window into how organizations create value and incur expenses as part of ongoing business activities. In this context, it is essential for organizations to not only focus on reported income but to compare profitability figures with the productivity of assets and the management of debt.

Although both of the aforementioned reports are indispensable to measuring supply chain results, the most telling information relative to understanding the financial effectiveness of global SCM is found in the cash flow statement (CFS). Itemized on the basis of cash flow from operations, investing and financing activities, the CFS in Figure 10.3 details the sources and uses of cash during the same period measured on the income statement. Integral to the structure of the CFS is the recognition of net income, changes in working capital, management of long-term assets and sources of financing.

Operating Activities

Net Income


Changes in Accounts Receivable

Changes in Accounts Payable

Changes in Other Payables

Changes in Inventories

Cash from Operating Activities

Investing Activities

Purchase of Fixed Assets

Sale of Marketable Securities

Cash from Investing Activities

Financing Activities

Issuance of Stock

Issuance of Long-Term Notes

Cash from Financing Activities

Net Increase or Decrease in Cash

Figure 10.3: Cash Flow Statement

From an operational, financial and investment perspective, the CFS synthesizes the key components of the balance sheet and income statement, focusing not only on profitability but how well a company manages assets as it generates sales. It is the changes in these accounts, as well as the net impact on cash that results from those changes, that is so critical to measuring the real contribution of SCM. Without detailed analysis of the CFS, the results of operating tactics can never really be calculated.

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