Showing posts with label Operating profit before working capital changes. Show all posts
Showing posts with label Operating profit before working capital changes. Show all posts

Tuesday 20 April 2010

Improve Cash Flow - Part 2 of 2

Previously we looked at generating cash from operations, capital expenditure and financing.  Here, we look at working capital.  This is a measure of the operating efficiency and liquidity of a business.

Working capital is the difference between current assets and current liabilities.  In other words the amount of cash required to finance inventory and trade receivables net of trade payables.  Cash tied up in inventory or money owed by customers cannot be used to pay short-term obligations, and therefore businesses need to release cash from these sources where possible.

Minimize inventory levels.
There are many methods of inventory management.  A well known technique is JIT ("just-in-time"), used mainly in manufacturing.   Goods are produced only to meet customer demand.  All inventory arrives from suppliers just in time for the next stage in the production process.  This technique minimizes inventory levels.

Minimize and control cash owed by customers.
It is important to follow procedures and be organized in collecting customer debts.  

Maximize the payment period to suppliers.
Delaying payments to suppliers will not generate cash but it will delay its outflow.  Many businesses use supplier credit as a source of finance.  Large and powerful customers are often accused of dictating extended payment terms, which add pressure to a small business's cash flow.  Extended credit should be negotiated as opposed to taken, to avoid problems in the future.  Businesses rely on their suppliers to keep their operations flowing, so payment terms should always be agreed in advance.

"Creditors have better memories than debtors; creditors are a superstitious sect, great observers of set days and times!"

Release working capital to pay short-term obligations.

Monday 8 June 2009

Operating Profit before Working Capital changes vs. Operating Cash Flow

Proton's Cash Flow Details

National car maker Proton Holdings Bhd should provide more details in its quarterly cash flow statement instead of just a summary.

Although the condensed statement did show the amount of cash flow generated from operations (operating cash flow), it didn't present the "operating profit before working capital changes", or spell out in detail how the operating cash flow was derived.

There is a huge difference between operating profit before working capital changes and operating cash flow.

Operating profit before working capital changes: This indicates the very basic operating cash flow scenario of a company, with the assumption that payments to suppliers are made on time while collection from client for the sale of goods is also received punctually.

A negative operating profit before working capital chagnes spells trouble for the viability of a company's operations. It means the company has to pour in cash to sustain its operations instead of generating cash from the operations.

The non-disclosure of operating profit before working capital changes denies investors an important piece of information. This is because companies could bump up their operating cash flow by adjusting their working capital, by delaying payment to suppliers or expediting the receipt of cash from customers.

These may blur investors' judgment about the basic health of the business or when they seek to compare the actual operating situation with the previous corresponding period.

Cash flow is the lifeblood of a busines, which is especially important in tough times. In order to give the public a better picture of its operating condition, Proton should present its quarterly cash flow statement in detail.





The Edge Malaysia June 8, 2009