1) Using the information contained in J. Washam\'s financial statement, calculat
ID: 2771639 • Letter: 1
Question
1) Using the information contained in J. Washam's financial statement, calculate the CCE, Cash Ratio, Cash Burn Rate, and net liquid balance. Interpret the trend in the these mesaures. What is your opinion of the firm's liquidy positon and why?
Balance Sheet 2007 2008 2009 2010 2011 Cash / Equivlants 75 75 90 100 100 Accounts Receivable 300 400 600 550 500 Inventory 150 250 350 250 250 Net Fixed Assets 525 575 610 540 465 Total Assets 1050 1300 1650 1440 1315 Accounts Payable 125 175 250 225 200 Notes Payable 165 162 178 136 99 Accured operating Exp. 60 161 165 89 76 Long term-debr 500 400 300 100 50 stockholders equity 200 402 757.2 890.2 890.2 total liabilties 1050 1300 1650 1440 1315Explanation / Answer
Cash burn Rate =Current Assets/Average daily operating costs
Net Liquid Balance = (cash & cash equivalents + short-term investments) - notes payable
CCE:
Why this is important is because the effectiveness of your end to end processes (order processing, manufacturing, delivery, billing, etc) can be measured by how efficient you convert sales into cash. If you read the post the efficiency myth the measure of efficiency is "Actual Effectiveness" divided by "Ideal Effectiveness". Applying this to converting sales into cash, think about the ideal amount of time we should be able to convert sales into cash. Let's say;
four weeks in total.
If we have 30 day terms we ideally should be able to convert sales to cash in about 8 weeks.
If this in reality is 16 weeks our efficiency is 50%, 8 weeks divided by 16 weeks. Efficiency is a measure of how effective our processes are.
The 2007 Cash Masters Survey of 1,000 companies in Europe used a metric called "Cash Conversion Efficiency which was calculated as cash flow from operations divided by sales. The amount of cash that comes out divided by the size of the sales contracts.
The good thing about this type of measure is that it is outcome based. How often do you get into finger pointing meetings where people say it is not our department's fault we are hitting our targets. And when you look across all the departments that make up the end to end value stream you notice that everyone is hitting "their" target, but you are still running at an efficiency level of half what it should be. The focus switches from who is right and who is wrong to how do we deliver a better outcome. This helps internal silos come down as people can make decisions around achieving the outcome instead of defending their turf.
This is noted in one of the better performers Telenor, a Norwegian Telecom, with the interesting observation that they are reversing the problems of the myth of control and the internal silo problems of the mythical benefits of shared services in the following example from the article;
"And rather than launching cost cuts dictated by rigid financial timetables, employees across all functions are asked to manage a "delicate balance" of short-term financial targets and long-term customer relationship goals. These shared, wide-ranging incentives encourage "a common understanding of each other's jobs," says Westlie. "Everyone contributes to decisions, and there is a lot of local autonomy."
Another important step in "tearing down silos," he explains, is to abandon the budgeting process. Next year Telenor will introduce a rolling five-quarter forecast covering both financial and non-financial metrics updated each quarter, in addition to a three-year outlook that's revised annually. Doing so, he predicts, will bolster the company's agility and shorten time-to-market. By "going dynamic" — the term used around Telenor — employees will be able to react faster to changes in the market, both in terms of chasing new opportunities and adjusting spending and other costs in response to business conditions."
Cash ratio= cash+ cash equivalents/Total current liabilities
0.076046
year asserts Operating cost burn rate 2007 1050 600 1.75 2008 1300 797 1.631116688 2009 1650 895 1.843575419 2010 1440 750 1.92 2011 1315 725 1.813793103Related Questions
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