Bottom Line Improvement
21
Bottom Line Improvement Financial Performance Improvement Anand Subramaniam
-
Upload
anand-subramaniam -
Category
Economy & Finance
-
view
1.547 -
download
1
Transcript of Bottom Line Improvement
Bottom Line Improvement
Financial Performance Improvement
Anand Subramaniam
2
“Solve it. Solve it quickly, solve it right or wrong. If you solve it wrong, it will come back and slap you in the face, and then you can solve it right. Lying dead in the water and doing nothing is a comfortable alternative because it is without risk, but it is an absolutely fatal way to manage a business.
”
- Thomas J. Watson
3
Highlights
Value Analysis
Dupont Analysis
Cash to Cash Cycle
Value Analysis
5
Today’s Challenges
Shorter Product Life Cycles Less time to recoup investment
Greater Product Segmentation Harder to achieve economies of scale Higher capital demands
Low Cost Competitors Reducing Margins Harder to grow sales
Competing for Capital in Global Markets Investors can go anywhere
Bottom Line Looking for ways to improve Financial Performance
6
Value Analysis
OPERATIONAL EXCELLENCE
ASSET UTILISATION
FixedCapital
Reduction
WorkingCapital
Reduction
LowestLanded
Total Cost
IncreasedCustomer
Service
Measures
• Perfect Order• Inventory Days• Total Landed Cost• Activity Based Cost
Measures
• Cash-to-Cash cycle time
• Segment profitability• Return on assets
Dupont Analysis
Strategic Profit Model
8
Dupont ModelSales
net profts
net worth(
$
$
$$
$ $
$
$
$
$
$
$
$
$-
Cost of goods sold
Direct expenses
+Indirect expenses
Inventory
+Accounts receivable
+Other current assets
%
%
)
Gross Margin
-
Total Expenses
Net Profit
÷Sales
Net profit margin
(net proftnet sales)
Current assets
+Fixed assets
Sales
/Total assets
Assets turnover
Return on net worth Financial leverage Return on assets
= x
(total assetsnet worth)= x (
net profittotal assets)
$
9
Current Situation (Baseline)SALES
COST OF GOODS SOLD
DIRECT EXPENSE
INDIRECT EXPENSE
INVENTORY
ACCOUNTS RECEIVABLE
OTHER CURRENT ASSETS
GROSS MARGIN
TOTAL EXPENSES
CURRENT ASSETS
FIXED ASSETS
TOTAL ASSETS
SALES
SALES
NET PROFIT
NET PROFIT MARGIN
ASSET TURNOVER
RETURN ON ASSETS
2000
300
1500
100
400
100
100
500
400
600
400
2000
1000
5%
TIMES
net profitnet sales
net salestotal assets
-
+
+
+
-
+
÷
÷
( )
)(
2
100
10%
2000
Price
Quantity
x
Cost of goods
Quantity
x
TransportationHandlingStorage Space Promotionetc.
10
ROI Impact - $100 Inv. ReductionSALES
COST OF GOODS SOLD
DIRECT EXPENSE
INDIRECT EXPENSE
INVENTORY
ACCOUNTS RECEIVABLE
OTHER CURRENT ASSETS
GROSS MARGIN
TOTAL EXPENSES
CURRENT ASSETS
FIXED ASSETS
TOTAL ASSETS
SALES
SALES
NET PROFIT
NET PROFIT MARGIN
ASSET TURNOVER
RETURN ON ASSETS
2000
300
1500
100
300
100
100
500
400
500
400
2000
900
5%
TIMES
net profitnet sales
net salestotal assets
-
+
+
+
-
+
÷
÷
( )
)(
2.22
100
11.11%
2000
Price
Quantity
x
Cost of goods
Quantity
x
TransportationHandlingStorage Space Promotionetc.
11
ROI Impact - $25 Exp. ReductionSALES
COST OF GOODS SOLD
DIRECT EXPENSE
INDIRECT EXPENSE
INVENTORY
ACCOUNTS RECEIVABLE
OTHER CURRENT ASSETS
GROSS MARGIN
TOTAL EXPENSES
CURRENT ASSETS
FIXED ASSETS
TOTAL ASSETS
SALES
SALES
NET PROFIT
NET PROFIT MARGIN
ASSET TURNOVER
RETURN ON ASSETS
2000
275
1500
100
400
100
100
500
375
600
400
2000
1000
6.25%
TIMES
net profitnet sales
net salestotal assets
-
+
+
+
-
+
÷
÷
( )
)(
2
125
12.5%
2000
Price
Quantity
x
Cost of goods
Quantity
x
TransportationHandlingStorage Space Promotionetc.
Cash to Cash Cycle
Working Capital Management
13
Working Capital Strategies
Financial Performance
Profitability GrowthCapital
Utlisation
Cost of Goods Sold
Selling PriceFixed Capital
Utilisation
Working Capital
Utilisation
Days InventoryDays Sales
OutstandingDays Purchase Outstanding
14
Inventory (Days)
Inventory (Days) = Inventory Value Cost per Day
Cost per Day = Cost of Goods Sold
365
Inventory Turns = Revenue Inventory Value
15
Your Inventory
Revenue =$ 300,000 Cost of Good Sold =$ 200,000 Inventory =$ 50,000
Cost per Day =$ 548 (200,000/365)
Days of Inventory = 91 (50,000/548)
Inventory Turns = 6 (300,000/50,000)
If you were to reduce 1 day in inventory .. guess the impact on your working capital?
16
Days Sales Outstanding
Days Sales Outstanding = Accounts Receivable Revenue / Day
Revenue =$ 300,000 Accounts Receivable =$ 100,000
Revenue per Day =$ 822 (300,000/365)
Days Sales Outstanding = 122 (100,000/822)
If you were to collect 1 day faster .. guess the impact on your working capital or how much you can free up ?
17
Days Purchase Outstanding
Days Purchase Outstanding = Accounts Payable Purchases / Day
Purchases =$ 200,000 Accounts Payable =$ 25,000
Purchase per Day =$ 548 (200,000/365)
Days Purchase O/standing = 46 days (25,000/548)
If you were to review your purchasing policy and negotiate payment / credit terms .. guess the impact on your working capital?
18
Cash to Cash Cycle
Cash to Cash Cycle = Days Of Inventory + Days Sales Outstanding - Days Purchases Outstanding
Above Example Days of Inventory = 91 Days Sales Outstanding = 122 Days Purchases Outstanding = ( 46)
Cash-to-Cash Cycle (days) =167
19
Small Step Improvement
Also please review my Inventory ppt slides about: lowering ordering & holding cost, lead time reduction, EOQ and min/max calculation using Pareto Analysis for stock reduction
20
“An expert is one who knows more and more about less and less”.
- Nicholas Murray Butler
