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Bottom Line Improvement

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Bottom Line Improvement

  1. 1. Bottom Line Improvement Financial Performance Improvement Anand Subramaniam
  2. 2. <ul><li>“ 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. ” </li></ul><ul><ul><li>- Thomas J. Watson </li></ul></ul>
  3. 3. Highlights <ul><li>Value Analysis </li></ul><ul><li>Dupont Analysis </li></ul><ul><li>Cash to Cash Cycle </li></ul>
  4. 4. Value Analysis
  5. 5. Today’s Challenges <ul><li>Shorter Product Life Cycles </li></ul><ul><ul><li>Less time to recoup investment </li></ul></ul><ul><li>Greater Product Segmentation </li></ul><ul><ul><li>Harder to achieve economies of scale </li></ul></ul><ul><ul><li>Higher capital demands </li></ul></ul><ul><li>Low Cost Competitors </li></ul><ul><ul><li>Reducing Margins </li></ul></ul><ul><ul><li>Harder to grow sales </li></ul></ul><ul><li>Competing for Capital in Global Markets </li></ul><ul><ul><li>Investors can go anywhere </li></ul></ul><ul><li>Bottom Line </li></ul><ul><ul><li>Looking for ways to improve Financial Performance </li></ul></ul>
  6. 6. Value Analysis <ul><li>Measures </li></ul><ul><li>Perfect Order </li></ul><ul><li>Inventory Days </li></ul><ul><li>Total Landed Cost </li></ul><ul><li>Activity Based Cost </li></ul><ul><li>Measures </li></ul><ul><li>Cash-to-Cash cycle time </li></ul><ul><li>Segment profitability </li></ul><ul><li>Return on assets </li></ul>OPERATIONAL EXCELLENCE ASSET UTILISATION Fixed Capital Reduction Working Capital Reduction Lowest Landed Total Cost Increased Customer Service
  7. 7. Dupont Analysis Strategic Profit Model
  8. 8. Dupont Model Sales ( $ $ $ $ $ $ $ $ $ $ $ $ $ $ - 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 proft net sales ) Current assets + Fixed assets Sales / Total assets Assets turnover Return on net worth Financial leverage Return on assets = x ( total assets net worth ) = x ( net profit total assets ) $ net profts net worth
  9. 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 profit net sales net sales total assets - + + + - + ÷ ÷ ( ) ) ( 2 100 10% 2000 Price Quantity x Cost of goods Quantity x Transportation Handling Storage Space Promotion etc.
  10. 10. ROI Impact - $100 Inv. Reduction 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 100 300 100 100 500 400 500 400 2000 900 5% TIMES net profit net sales net sales total assets - + + + - + ÷ ÷ ( ) ) ( 2.22 100 11.11% 2000 Price Quantity x Cost of goods Quantity x Transportation Handling Storage Space Promotion etc.
  11. 11. ROI Impact - $25 Exp. Reduction SALES COST OF GOODS SOLD DIRECT EXPENSE INDIRECT EXPENSE INVENTORY ACCOUNTS RECEIVABLE OTHER CURRENT ASSETS GROSS MARGIN TOTAL EXPENSES CURRENT ASSETS FIXED ASSETS TOTAL ASSETS SALES SALES NET PROFIT NET PROFIT MARGIN ASSET TURNOVER RETURN ON ASSETS 2000 275 1500 100 400 100 100 500 375 600 400 2000 1000 6.25% TIMES net profit net sales net sales total assets - + + + - + ÷ ÷ ( ) ) ( 2 125 12.5% 2000 Price Quantity x Cost of goods Quantity x Transportation Handling Storage Space Promotion etc.
  12. 12. Cash to Cash Cycle Working Capital Management
  13. 13. Working Capital Strategies Financial Performance Profitability Growth Capital Utlisation Cost of Goods Sold Selling Price Fixed Capital Utilisation Working Capital Utilisation Days Inventory Days Sales Outstanding Days Purchase Outstanding
  14. 14. Inventory (Days) <ul><li>Inventory (Days) = Inventory Value </li></ul><ul><li> Cost per Day </li></ul><ul><li>Cost per Day = Cost of Goods Sold 365 </li></ul><ul><li>Inventory Turns = Revenue </li></ul><ul><li> Inventory Value </li></ul>
  15. 15. Your Inventory <ul><li>Revenue =$ 300,000 </li></ul><ul><li>Cost of Good Sold =$ 200,000 </li></ul><ul><li>Inventory =$ 50,000 </li></ul><ul><li>Cost per Day =$ 548 (200,000/365) </li></ul><ul><li>Days of Inventory = 91 (50,000/548) </li></ul><ul><li>Inventory Turns = 6 (300,000/50,000) </li></ul><ul><li>If you were to reduce 1 day in inventory .. guess the impact on your working capital? </li></ul>
  16. 16. Days Sales Outstanding <ul><li>Days Sales Outstanding = Accounts Receivable </li></ul><ul><li> Revenue / Day </li></ul><ul><li>Revenue =$ 300,000 </li></ul><ul><li>Accounts Receivable =$ 100,000 </li></ul><ul><li>Revenue per Day =$ 822 (300,000/365) </li></ul><ul><li>Days Sales Outstanding = 122 (100,000/822) </li></ul><ul><li>If you were to collect 1 day faster .. guess the impact on your working capital or how much you can free up ? </li></ul>
  17. 17. Days Purchase Outstanding <ul><li>Days Purchase Outstanding = Accounts Payable </li></ul><ul><li> Purchases / Day </li></ul><ul><li>Purchases =$ 200,000 </li></ul><ul><li>Accounts Payable =$ 25,000 </li></ul><ul><li>Purchase per Day =$ 548 (200,000/365) </li></ul><ul><li>Days Purchase O/standing = 46 days (25,000/548) </li></ul><ul><li>If you were to review your purchasing policy and negotiate payment / credit terms .. guess the impact on your working capital? </li></ul>
  18. 18. Cash to Cash Cycle <ul><li>Cash to Cash Cycle = Days Of Inventory + Days Sales Outstanding - Days Purchases Outstanding </li></ul><ul><li>Above Example </li></ul><ul><ul><li>Days of Inventory = 91 </li></ul></ul><ul><ul><li>Days Sales Outstanding = 122 </li></ul></ul><ul><ul><li>Days Purchases Outstanding = ( 46) </li></ul></ul><ul><li>Cash-to-Cash Cycle (days) =167 </li></ul>
  19. 19. Small Step Improvement <ul><li>Also please review my Inventory ppt slides about: </li></ul><ul><ul><li>lowering ordering & holding cost, </li></ul></ul><ul><ul><li>lead time reduction, </li></ul></ul><ul><ul><li>EOQ and min/max calculation </li></ul></ul><ul><ul><li>using Pareto Analysis for stock reduction </li></ul></ul>
  20. 20. <ul><li>“An expert is one who knows more and more about less and less”. </li></ul><ul><ul><li>- Nicholas Murray Butler </li></ul></ul>
  21. 21. <ul><li>Good Luck </li></ul><ul><li>http://www.linkedin.com/in/anandsubramaniam </li></ul>

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