3. Process Flow Measures
MBPF Inc.: Consolidated Income Statement
1
Net Sales
250.0
Costs and expenses
Cost of Goods Sold
Selling, general and administrative expenses
Interest expense
Depreciation
Other (income) expenses
TOTAL COSTS AND EXPENSES
175.8
47.2
4.0
5.6
2.1
234.7
INCOME BEFORE INCOME TAXES
PROVISION FOR INCOME TAXES
NET INCOME
15.3
7.0
8.3
RETAINED EARNINGS, BEGINNING OF YEAR
LESS CASH DIVIDENDS DECLARED
RETAINED EARNINGS AT END OF YEAR
31.0
2.1
37.2
NET INCOME PER COMMON SHARE
DIVIDEND PER COMMON SHARE
0.83
0.21
3. Process Flow Measures
MBPF Inc.: Balance Sheet
2
CURRENT ASSETS
Cash
Short-term investments at cost (approximate mkt.)
Receivables, less allowances of $0.7 mil
Inventories
Other current assets
TOTAL CURRENT ASSETS
PROPERTY, PLANT AND EQUIPMENT (at cost)
Land
Buildings
Machinery and equipment
Construction in progress
Subtotal
Less accumulated depreciation
NET PROPERTY, PLANT AND EQUIPMENT
Investments
Prepaid expenses and other deferred charges
Other assets
TOTAL ASSETS
2.1
3.0
27.9
50.6
4.1
87.7
2.1
15.3
50.1
6.7
74.2
25.0
49.2
4.1
1.9
4.0
146.9
(Selected) CURRENT LIABILITIES
Payables
11.9
3. Process Flow Measures
MBPF Inc.: Balance Sheet
3
Compute average flow time through Accounts Receivable.
A flow unit here is a dollar of Accounts Receivable
Throughput RAR = $250 million/year (net sales from income statement)
Average Inventory IAR = $27.9 million (from the balance sheet)
TAR = IAR/RAR  TAR = $27.9/$250  TAR = 0.112 years or 5.80 weeks
After a sale is made, the firm must wait almost 6 weeks before sales dollars are
collected! Decreasing this lag time between sale and collection can dramatically
improve cash flow for the company to route to other needs!
Compute average flow time of Accounts Payable. Flow unit here is $1 of AP
Average accounts payable (inventory in purchasing) is $11.9 million = IAP
Throughput RAP = Purchased Raw Materials + Purchased Parts
RAP = $50.1 million + $40.2 million = $90.3 Million
TAP = IAP/RAP  TAP = 11.9 / 90.3  TAP = 0.13 years or 6.9 weeks to pay a bill.
3. Process Flow Measures
MBPF Inc.: Inventory and Cost of Goods
4
INVENTORY
Raw materials (roof)
Fabrication WIP (roof)
Purchased parts (base)
Assembly WIP
Finished goods
TOTAL
COST OF GOODS SOLD
Raw materials
Fabrication (L&OH)
Purchased parts
Assembly(L&OH)
TOTAL
6.5
15.1
8.6
10.6
9.8
50.6
50.1
60.2
40.2
25.3
175.8
Compute the average flow time in production operations:
I = TR  I = Total Inventory, R = Cost of Goods Sold
T = $50.6MM (value of inventory) / $175.8 MM (Annual COGS)
T = 0.288 years or 15 week
It takes 15 weeks for a dollar invested in the factory to be billed to a customer.
3. Process Flow Measures
Analyzing Financial Flows: Cash-to-Cash Cycle
5
Cost-to-Cash Cycle: Measures time between the point that cost dollars are invested
and sales dollars are received.
Cost-to-Cash-Cycle: MBPF Inc. = + 15 weeks in production
+ 5.8 weeks in AR after the point of sale
Cost-to-Cash-cycle = 20.8 weeks
Cash-to-Cash Cycle: Similar, but nets out lag time in AP.
MBPF Inc. pays for the cost dollar 6.9 weeks after a purchase (cost) is made.
Cash-to-Cash-Cycle: MBPF Inc. = + 15 weeks in production
+ 5.8 weeks in AR after the point of sale
- 6.9 weeks in AP after the point of purchase
Cash-to-Cash-cycle = 14.1 weeks
3. Process Flow Measures
Analyzing Financial Flows: Improvement with Flow Analysis
6
Throughput (R) of each department: the cost of inputs + the cost of
human and capital resources (labor, equipment, building, etc.)
For MBPF, throughput in fabrication is:
$50.1 million/year in raw materials
+ $60.2 million in labor and overhead
R = $110.3 million/year total throughput.
Flow Analysis is important in order to improve process performance.
Conduct a detailed flow analysis of each step of the process.
Identify the area within a process that can benefit the most
from improvements
3. Process Flow Measures
Row Material and Resources
7
$60.2/yr
$25.3/yr
$50.1/yr
Raw Materials
(roofs)
Fabrication
(roofs)
Assembly
$40.2/yr
Purchased Parts (bases)
Finished Goods
3. Process Flow Measures
Throughput and Inventories at Different Processes
8
$60.2/yr
$50.1/yr
$6.5
Raw Materials
(roofs)
$40.2/yr
$25.3/yr
$110.3/yr
$15.1
Fabrication
(roofs)
$8.6
Purchased Parts (bases)
$10.6
Assembly
$40.2/yr
$175.8/yr
$9.8
Finished Goods
$175.8/yr
3. Process Flow Measures
Flow Times
9
Throughput R
$/Year
$/Week
Inventory I ($)
Flow Time T =
I/R (weeks)
Raw
Materials
Fabrication
Purchased
Parts
Assembly
Finished
Goods
50.1
0.96
6.5
6.75
110.3
2.12
15.1
7.12
40.2
0.77
8.6
11.12
175.8
3.38
10.6
3.14
175.8
3.38
9.8
2.90
3. Process Flow Measures
Flow Rate vs. Flow Time
10
Flow rate R
($/week)
4.8
3.38
Accounts
Receivable
Assembly
2.12
Goods
Fabrication
0.96
0.77
Finished
Purchased Parts
11.12
Raw
Materials
6.75
7.12
Flow Time T (weeks)
3.14
2.90
5.80
3. Process Flow Measures
Analyzing Financial Flows: Improvement with Flow Analysis
11
Working capital in each department includes the amount of
inventory in it.
Flow time here is the amount of time a cost dollar spends
(on average) in that department.
We can then ask, “in which department does a reduction in
flow time have the greatest impact on working capital?”
The larger the current flow time, the greater an impact in
decreasing flow time will have on reducing working capital.
In the MBPF example, we learn that a 1 week reduction in AR
would free up approximately $5MM to the firm!
3. Process Flow Measures
Inventory Turns (Turnover Ratio)
12
How many times has your inventory been sold and then replaced
during the given time period?
Inventory Turns = Cost of Good Sold / Average Inventory = R / I
Little’s Law: I = RT  Inventory Turns = R / RT  1/T
Inventory Turns is the reciprocal of average flow time.
Inventory turns at MBPF
Inventory Turns = ($175.8MM (Total throughput per year) /
$50.6MM (Avg. Inv) = 3.47 Turns per year
3. Process Flow Measures
Flow Rate vs. Inventory Turns
13
Flow rate R
($/week)
6
5
AR
4
Assembly
FG
3
Fabrication
2
Purchased
Parts
1
RM
0
0
0.1
0.2
0.3
Effort to cut flow time: 1/T (1/weeks)
0.4