Working Capital Analysis Powered by ilumen

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Lorena Stokes
7 years ago
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1 Working Capital Analysis Explanation of Analysis: The first purpose of this report is to separate 1) the impact sales growth or decline has on Accounts Receivable, Inventory, Accounts Payable and Gross Profit from 2) the impact of other business decisions such as lowering the sales price, changing inventory policies, extending credit terms, changing product mix etc. For example, if a company's revenue grew at 10%, one would expect Inventory, Accounts Receivable, Accounts Payable and Gross Profit to all grow by 10% also. If these items grew by more or less than 10%, then this should be evaluated to see the positive or negative impact. The second purpose is to illustrate the potentially tremendous impact growth or decline in revenue can have on the cash needs of the company. Again if the company's revenue grew by 10%, the additional gross profit earned may be far outstripped by a corresponding 10% increase in Accounts Receivable, Inventory and Accounts Payable.

2 Cash Flow Drivers $20,000 $18,000 $16,000 $14,000 $12,000 $10,000 $8,000 $6,000 $4,000 Actual Revenue vs. CPI Adjusted Revenue Total Revenue ($000's) Revenue Adjusted for CPI* ($000's) Total Revenue ($000's) Revenue Growth Annual CPI Percentage* $17,576 $9,868 $9,700 $13,696 (43.9%) (1.7%) 41.2% 3.0% 1.7% N/A Days Sales Outstanding Inventory Days Days Payable Operating Cycle A/R ($000's) $2,587 $1,001 $1,977 $2,294 Inventory ($000's) $2,194 $1,363 $1,697 $1,967 A/P ($000's) $798 $410 $886 $1,112 * Consumer Price Index obtained from the U.S. Department of Labor Bureau of Labor Statistics

3 Cash Flow Impact - Summary Impact on Cash Change in Cash Flow Driven by Changes in Revenue [41.2% growth] More Accounts Receivable Additional Inventory Higher Accounts Payable Increased Gross Profit Dollars ($814,464) ($699,239) $365,187 $268,467 j l n p Net Negative Cash Flow Impact of Revenue Growth ($880,049) Change in Cash Flow Driven by Changes in Operations Faster Accounts Receivable Collection Faster Inventory Turnover Quicker Payment on Accounts Payable Higher Gross Profit Margins $496,823 $429,224 ($139,800) $663,066 k m o q Net Positive Cash Flow Impact of Operational Changes $1,449,313 Net Cash Flow Impact $569,264 Net Interest Benefit at a 6.0% Rate $34,156 Combined Net Impact on Cash Flow $603,420 The growth in sales resutled in a cash flow USE of $880,049. This highlights the impact sales growth has on cash flow. Note, if the trend was the opposite, a 41.2% decline in sales, this would result in a cash flow SOURCE of $880,049. Management made decisions which had a net increase on cash flow of $1,449,313. The decisions should be evalutated to see if they will continue and if they need to be supported or corrected.

4 Cash Flow Impact of Changes in A/R $3,000 $2,500 $1,500 $500 Accounts Receivable A/R ($000's) Days Sales Outstanding If credit policies and sales mix were unchanged, you would expect accounts receivable to grow by 41.2% as well. A/R: 2012 Revenue Growth Increase in A/R $1,976,840 x 41.2% = $814,464 Your actual accounts receivable grew by $317,641, a difference of $496,823 from what was expected. Acutal A/R: 2013 Expected A/R: 2013 Operational Variance $2,294,481 - $2,791,304 = ($496,823) The impact on accounts receivable caused by the increase in sales [Cash USE of $814,464] and the changes in operations - slower collection, extended terms, etc. [Cash SOURCE of $496,823] resulted in a net increase in accounts receivable of $317,641. This net increase resulted in cash flow being trapped in accounts receivable and not available for other corporate purposes such as debt repayment, inventory purchases, expense payments, fixed asset purchases etc. Beginning Accounts Receivable: Ending Accounts Receivable: $1,976,840 $814,464 j A/R days decreased ($496,823) k << from 74.4 to 61.1 $2,294,481

5 Cash Flow Impact of Changes in Inventory $2,500 $1,500 $500 Inventory Inventory ($000's) Inventory Days If product mix was unchanged, you would expect inventory to grow by 41.2% as well. Inv.: 2012 Revenue Growth Increase in Inv. $1,697,168 x 41.2% = $699,239 Your actual inventory grew by $270,015, a difference of $429,224 from what was expected. Acutal Inv.: 2013 Expected Inv.: 2013 Operational Variance $1,967,183 - $2,396,407 = ($429,224) The impact on inventory caused by the increase in sales [Cash USE of $699,239] and the changes in operations - new products, change in process, etc. [Cash SOURCE of $429,224] resulted in a net increase in inventoryof $270,015. This net increase resulted in cash flow being trapped in inventory and not available for other corporate purposes such as debt repayment, inventory purchases, expense payments, fixed asset purchases etc. Beginning Inventory: $1,697,168 $699,239 l Inv. days decreased Ending Inventory: ($429,224) m << from 68.5 to 59.3 $1,967,183

6 Cash Flow Impact of Changes in A/P $1,200 $800 $600 $400 $200 Accounts Payable A/P ($000's) Days Payable If credit terms and pricing were unchanged, you would expect accounts payable to grow by 41.2% as well. A/P: 2012 Revenue Growth Increase in A/P $886,370 x 41.2% = $365,187 Your actual accounts payable grew by $225,387, a difference of $139,800 from what was expected. Acutal A/P: 2013 Expected A/P: 2013 Operational Variance $1,111,757 - $1,251,557 = ($139,800) The impact on accounts payable caused by the increase in sales [Cash SOURCE of $365,187] and the changes in operations - change in credit terms, product mix, processes, etc. [Cash USE of $139,800] resulted in a net increase in accounts payable of $225,387. This net increase resulted in a cash flow delay in accounts payable. This delay in payment allowed cash to be used for other corporate purposes such as debt repayment, inventory purchases, expense payments, fixed asset purchases etc. Beginning Accounts Payable: $886,370 $365,187 n A/P days decreased Ending Accounts Payable: ($139,800) o << from 35.8 to 33.5 $1,111,757

7 Cash Flow Impact of Changes in Gross Profit $3,500 $3,000 $2,500 $1,500 $500 Gross Profit Gross Profit ($000's) Gross Margin % If pricing and sales mix were unchanged, you would expect gross profit to grow by 41.2% as well. G/P: 2012 Revenue Growth Increase in G/P $651,614 x 41.2% = $268,467 Your actual gross profit grew by $931,533, a difference of $663,066 from what was expected. Acutal G/P: 2013 Expected G/P: 2013 Operational Variance $1,583,147 - $920,081 = $663,066 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% The impact on gross profit caused by the increase in sales [Cash SOURCE of $268,467] and the changes in operations - pricing, product mix, etc. [Cash SOURCE of $663,066] resulted in a net increase in gross profit of $931,533. This net increase resulted in more cash flow being available for other corporate purposes such as debt repayment, inventory purchases, expense payments, fixed asset purchases etc. Beginning Gross Profit: $651,614 $268,467 p Gross margin increased Ending Gross Profit: $663,066 q << from 6.7% to 11.6% $1,583,147

Income Measurement and Profitability Analysis

Income Measurement and Profitability Analysis PROFITABILITY ANALYSIS The following financial statements for Spencer Company will be used to demonstrate the calculation of the various ratios in profitability analysis. Spencer Company Comparative Balance