The operations section of the report on cash flows a reconciliation of net income and cash flow by adding non-cash expenses and cash assets changes in working capital. The increase in current assets and decrease in current liabilities is considered a use of cash that is pushing down cash flows from operating activities relative to net income.
To create a strategy that will avoid reducing the cash flow from operating activities, enterprises should focus on maximizing net profit and optimize efficiency.
The following factors will all decrease cash flows from operating activities:
1. The Decline In Net Income
The report about cash flows starts with net income, which is equal to the profit reported income. As the first entry in the report on cash flow, the reduction of net profit is one of the main factors causing reduction of cash flows from operations from one period to the next. Net income reflects sales and expenses for a certain period and allows investors to get an idea of the performance of the operating company.
2. The decline in sales or compression margin
Sales may adversely affect the changing economic conditions, decline in prices, time during the life cycle of the product or poor performance. These changes can be attributed to a decrease in aggregate demand in the economy, entry of new competitors or ineffective sales and marketing activities.
Margin compression may occur due to said loss of pricing power, although this may also be due to poor management account internally.
3. Changes in working capital
The most significant uses of cash in the operating activities section, as a rule, changes in working capital. The increase and decrease in certain current assets and liabilities reflected in the statement of cash flows. The increase of assets or decrease of liabilities from one period to another is to use cash and reduce cash flows from operating activities.
Working capital management is evaluated on performance indicators such as inventory turnover period of accounts receivable and accounts payable days.
The Decrease In Inventory Turnover
Inventory turnover is calculated by determining the ratio or sales period end inventory period. The decrease in inventory turnover usually indicates less efficient inventory management. Poor inventory Management increases inventory levels on the balance at any point in time. This use of cash, which reduces cash flows from operating activities.
The growth period of repayment of receivables
Days days sales outstanding measures how quickly the company collects cash from customers. This is calculated by multiplying the number of days in the period by the ratio of receivables to sales the loan in time. If sales days outstanding is rising, this indicates a poor accounts receivable collection practices. This leads to an increase in current assets, comprising cash, which reduces cash flows from operating activities.
The decrease in days in accounts payable
Days in accounts payable measures how quickly the business pays its suppliers. It is calculated by multiplying the days in the period by the ratio of accounts payable to cost of revenues in the period. When the days of payables reduces the time required for the company to pay its suppliers reduce. This reduces the accounts payable on the balance sheet. The decrease in current liabilities is a use of cash, and this reduces cash flow from operating activities.