Financial Operations Analysis of a Company

What percentage of a company’s assets is fixed assets versus liquid assets? We need to know how much is being invested in the company over the long term. Another important factor is your fixed assets as a percentage of your total assets. One of the standard measures that you will find in the industry is the percentage of long term debt compared to equity. This ratio will immediately demonstrate the risk the company is undertaking. Of course, this can only be done taken into account the amount of fixed capital necessary in a given industry. A service type company or distribution company is not going to need as much fixed capital as a manufacturing company. Manufacturing companies take raw material or purchased parts, and provide some value added through labor and machinery. The product is then sold directly to their customers or to distributors of the product.

After we get an idea of the supply chain efficiency, we want to look at manufacturing efficiency, which we can understand by calculating the number of days it takes a company to send products through its factories. We want to work up what is the total cash cycle, which is how many days before the goods are manufactured and sold.

If a company can knock thirty days off the cash cycle, they could offer significant cash incentives to gain concessions from some key suppliers. It is this type of analysis that brings tremendous value to the total Cash cycle. One example of a company that has successfully used this type of analysis is Dell Computer. Dell has built their focus on cash conversion to capture significant market share from their competitors, and build a business model that is allowing them to move beyond personal computers and into other retail electronics, while still dominating their market. Adding in the supply chain efficiencies, Dell’s materials and parts move through their warehouse, manufacturing, and distribution to the customer in just over one week, while their competitor takes almost a full two weeks longer.

Companies that are publicly traded companies compete not only in terms of sales, but with each other in the equity market. It may be appropriate to look at the individual operating trends of the competitors in the industry. If they are privately owned, you can figure out their stats by looking at their publicly owned competitors. By understanding their industry, it is much easier to sell to them.

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