PRESENTED BY :
ROBIN K THAKUR
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.

Amount of cash a company has tied up for
just running the business.

Minimum value is desirable.

WC = Current Assets
-
(Inventory, Accounts Receivable)
Current Liabilities
(Accounts Payable)
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
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
Lets consider a company with
Inventory Level = $1 billion .
Through various initiatives, planning to
Reduce inventories by 10%, or $100 million.
•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
Cash flow is the movement of money into or out of a business
Inventory level
By $100 million
Working Capital
By $100 million
Cash Flow
By $100 million
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
2. Cost of Capital : Shareholder returns
= 8-12%
Potential Impact = 8 -12 % of $100 millions
= $8million - $12 million
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
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).

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