A Little Supply Chain Finance 101 by Dan Gilmore,

Editor-in-Chief , Supply Chain Digest

PRESENTED BY : ROBIN K THAKUR

AGENDA

1. Working Capital

2. Impacts of Inventory on Financial statement

a) Impact on Balance Sheet. b) Impact on Cash Flow. c) Impact on Income Statement. d) Impact on other parameters

3. Summary of the Impact.

WHAT IS WORKING CAPITAL?

Amount of cash a company has tied up for just running the business.

Minimum value is desirable.

WC = Current Assets - Current Liabilities

(Inventory, Accounts Receivable) (Accounts Payable)

WORKING CAPITAL

Ways to decrease working capital: WC= Current Assets –Current Liabilities a) Decrease current assets a.1) Reduce Inventory. a.2) Reducing the time to collect money from

customers

b) Increase Current Liabilities b.1) Increase the time to pay vendors

Dell once had a negative working capital

IMPACTS OF INVENTORY ON FINANCIAL STATEMENTS

Inventory A key indicator of supply chain excellence, The area where supply meets demand. 

Financial Statements under consideration: Balance Sheet Cash flow statement and Income statement

ASSUMPTION

Lets consider a company with Inventory Level = $1

billion .

Through various initiatives, planning to

Reduce inventories by 10%, or $100 million.

IMPACT ON BALANCE SHEET•Initial Inventory Level = $1 Billion•Final Inventory Level = $ 900 Million•Reduction in Inventory Level = $ 100 Million•Percentage Reduction = 10%

•Current Assets = Reduction $ 100 Million

•Working Capital = Reduction by $ 100 Million

IMPACT ON CASH FLOW

Inventory level By $100 million

Working Capital By $100 million

Cash Flow By $100 million

Cash flow is the movement of money into or out of a business

IMPACT ON INCOME STATEMENT

There are several ways to calculate the impact on income statement:

1. Cost of borrowing the money: Approximately 5%.

Potential Impact= 5% of $100

million = $5

million

IMPACT ON INCOME STATEMENT

2. Cost of Capital : Shareholder returns = 8-12%

Potential Impact = 8 -12 % of $100 millions

= $8million - $12 million

IMPACT ON INCOME STATEMENT

2. Inventory Carrying Cost(ICC):

ICC = Interest Cost / Cost of Capital + Inventory Associated Cost

(Storage,Handling,Insurance,Taxes etc) = 19% (according to the CSCMP state of logistics model)

Potential Impact = 19 % of $100 millions = $19 million

IMPACT ON INCOME STATEMENT

Question : Would the $19million saving show up on the income statement?

Answer : No, because only some portion of the carrying costs represent a reduction in operating expense (which goes through the income statement).

IMPACT ON OTHER FINANCIAL STATEMENTS

Return on assets = Profit / Assets Inventory , Assets , Return

on asset

According to the Gerry Marsh’s proprietary models :

“Reducing inventory and improving cash flows has an positive impact on a company's valuation or stock price”

SUMMARY OF THE IMPACT

THANK YOU