Working Capital Analysis
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Sample Company
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.
Internal Management Use Only
Cash Flow Drivers
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Sample Company
Actual Revenue vs. CPI Adjusted Revenue
$20,000
$18,000
$16,000
$14,000
$12,000
$10,000
$8,000
$6,000
$4,000
$2,000
$2010
2011
2012
Total Revenue ($000's)
2013
Revenue Adjusted for CPI* ($000's)
2010
2011
2012
2013
$17,576
$9,868
$9,700
$13,696
Revenue
Growth
(43.9%)
(1.7%)
41.2%
Annual CPI
Percentage*
3.0%
1.7%
N/A
Total Revenue
($000's)
Days Sales
Outstanding
53.7
37.0
74.4
61.1
Inventory Days
54.5
55.0
68.5
59.3
Days Payable
19.8
16.5
35.8
33.5
Operating
Cycle
88.4
75.4
107.1
86.9
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 - 2013
Internal Management Use Only
Cash Flow Impact - Summary
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Sample Company
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
Net Positive Cash Flow Impact of Operational Changes
Net Cash Flow Impact
k
m
o
q
$1,449,313
$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.
Internal Management Use Only
Cash Flow Impact of Changes in A/R
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Sample Company
Accounts Receivable
$3,000
80
70
$2,500
60
$2,000
50
$1,500
40
30
$1,000
20
$500
10
$-
0
2010
2011
2012
A/R ($000's)
2013
Days Sales Outstanding
Revenue grew by 41.2% from 2012 to 2013
Revenue: 2012
$9,699,500
Revenue: 2013
-
Revenue Growth
=
$13,695,725
$3,996,225
If credit policies and sales mix were unchanged, you would expect accounts
receivable to grow by 41.2% as well.
A/R: 2012
$1,976,840
Revenue Growth
x
Increase in A/R
=
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:
Change Due to Revenue Growth:
Change Due to Operations:
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
Internal Management Use Only
Cash Flow Impact of Changes in Inventory
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Sample Company
Inventory
$2,500
80
70
$2,000
60
50
$1,500
40
$1,000
30
20
$500
10
$-
0
2010
2011
2012
Inventory ($000's)
2013
Inventory Days
Revenue grew by 41.2% from 2012 to 2013
Revenue: 2012
$9,699,500
Revenue: 2013
-
Revenue Growth
=
$13,695,725
$3,996,225
If product mix was unchanged, you would expect inventory to grow by 41.2% as
well.
Inv.: 2012
$1,697,168
Revenue Growth
x
Increase in Inv.
=
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:
Change Due to Revenue Growth:
Change Due to Operations:
Ending Inventory:
$1,697,168
$699,239 l
Inv. days decreased
($429,224)m << from 68.5 to 59.3
$1,967,183
Internal Management Use Only
Cash Flow Impact of Changes in A/P
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Sample Company
Accounts Payable
$1,200
40
35
$1,000
30
$800
25
$600
20
15
$400
10
$200
5
$-
0
2010
2011
2012
A/P ($000's)
2013
Days Payable
Revenue grew by 41.2% from 2012 to 2013
Revenue: 2012
$9,699,500
Revenue: 2013
-
Revenue Growth
=
$13,695,725
$3,996,225
If credit terms and pricing were unchanged, you would expect accounts payable to
grow by 41.2% as well.
A/P: 2012
$886,370
Revenue Growth
x
Increase in A/P
=
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:
Change Due to Revenue Growth:
Change Due to Operations:
Ending Accounts Payable:
$886,370
$365,187 n
A/P days decreased
($139,800)o << from 35.8 to 33.5
$1,111,757
Internal Management Use Only
Cash Flow Impact of Changes in Gross Profit
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Sample Company
Gross Profit
$3,500
18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$2010
2011
2012
2013
Gross Profit ($000's)
Gross Margin %
Revenue grew by 41.2% from 2012 to 2013
Revenue: 2012
$9,699,500
Revenue: 2013
-
Revenue Growth
=
$13,695,725
$3,996,225
If pricing and sales mix were unchanged, you would expect gross profit to grow by
41.2% as well.
G/P: 2012
$651,614
Revenue Growth
x
Increase in G/P
=
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
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:
Change Due to Revenue Growth:
Change Due to Operations:
Ending Gross Profit:
$651,614
$268,467 p
Gross margin increased
$663,066 q << from 6.7% to 11.6%
$1,583,147
Internal Management Use Only