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THE IMPACT OF STOCK TURNOVER, DSO AND DPO ON PROFITABILITY
Aralık 22nd, 2012-Finance, -Supply Chain, Generaladmin 1 Comments

Do we really make profit?

Today, many companies are looking for an answer to this question in classic way by using Profit and Loss tables and balance sheets. Theoratically, it is calculated  by subtracted total expenses from total revenue in order to decide whether it is profitable or not.

Well, is this method enough to know how much profit we make? Or, which parameters we need to take into consideration for profitability calculation?

Let’s explain this  with a simulation. Assuming that we produce a good (It will be sold out consecutive 5 years)

  • Initial investment cost: 51250.TL
  • Unit meterial cost: 150,TL
  • Unit Production Cost: 53,33
  • Sale Price: 225,9 (10% profit rate)
  • Sales Quantity: 25000
  • Turnover (5 years): 5,648,042 (25000*Sales price)
  • Total meterial cost: 3,750,000 (25*Unit meterial cost)
  • Total General expenses: 1,384,583 (25000*unit production cost)+initial investment
  • Stock Turnover : 4 (total meterial is assumed 4 different terms on yearly basis)
  • Account receivables: 90 days (Customer payment+90 days later)
  • Account payables: 90 days ( supplier payment+ 90 days)
  • Shipment Frequency: 60 days (every 60 days, 6 times a year)
  • Shipment quantity: 25000/5/6=833 unit
  • Shipment turnover: 833*225,9= 186.268

Lets investigate cah flow of this case,

A ) Execute the shipmets every 60 days. 6 times a year, following 5 years 30 times within 5 years. Each shipment 833 unit and 186 TL turnover

Assuming Days sales outstanding is 90 days.

This means that shipment will be carried out in 0,2,4,6,8 … months  but cash receivement will be 3,5,7..61 months and each installment will be 186,268 TL

B) Purchasing process is composed by assigning stock turnover as 4. This means that it will be every 3 months and 4 times a year and  20 times in total. In each purchasing process will be 187.500 TL

Days payable outstanding is assumed as 90 days

This means that the payment of purchased meterial on 0,3,6 the month will be 3,6,9,12…60 month at 187.500 TL (each payment installment)

C) Assuming initial investment cost in the beginning as 51,250 TL. Subtract initial invstment cost from total general expenses and divided into 60 months, which gives monthly fixed expenses. According to this, initial 54,250 TL and 22,222 TL for each month (from 1st month to 60th) will be cash payment for production cost.

Cash flow will be as below.

  • Starting from the 3rd month, every 2 months186,268 TL Money received
  • Starting from 3rd month, every 3 months 187.500 tl payment for supplier
  • Starting from 1st month, every month 22,222 TL production expenses
  • Just for once 52,250 TL initial cost

Now, let us calculate the NPV of all receivable and payable fort his cash flows.

NPV: If your A TL capital ,with  n% interest rate within Y month is equal to Z amount, NPV of Z is calculated as below,

  1. Multiplier 1 : log (1 + %n) ; Log (1+0.01) = 0,004321
  2. Multiplier 2 : (Y x Multiplier 1) ; 15 x 0,004321 = 0,06482
  3. Augmentation percentage ,Month : 10^Multiplier 2 = 10^0,06482 = 1,16097
  4. Future Value : Z = ( A x AY)
  5. Present Value : A = Z / AY ; A =  116,097/1,16097 = 100 TL

According to the Formula, NPV of the balance is as follows,

  • Total revenue: 4,169,055
  • Total Meterial: 2,781,779
  • Total production Expense : 1,019,363
  • Total Profit : 367,912

Lets change the scenerio.

Changing the stock turnover from 4 to 12 which means 12 purchasing a year. Also, changing receivable maturity from 90 to 60 days and payments from 90 to 120 days. What we do is to increase the purchasing installments and decrese the cahs amount per installment, and make sooner the receivable 30 days earlier and remit the supplier payments 30 days later.

Under these conditions, ner balance sheet will be as fallows,

  • Total revenue: 4,210,745
  • Total meterial:2,727,057
  • Total prodution expenses:1,019,363
  • Total Profit: 464,325.

As seen above, profitability was 367912 previously, and now it increase to 464,325 TL.

We just changed the value of Stock turnover, DSO and DPO.

STOK, DSO ve DPO’nun karlılığa etkisi

As a result, in order to make more profit, it is highly important to heed cash flow speed. In order to do that, it is vital to control stock turnover DSO and DSP. In the examples above, efficiency im production process has been ruled out. Adding efficiency into enhancement in cash flow will increase the profitability comparing to other competitors. To do that, is to be LEAN.

 

 

'One Response to “THE IMPACT OF STOCK TURNOVER, DSO AND DPO ON PROFITABILITY”'
  1. [...] In order to track the costs of the stocks, organizations check the performance levels of the processes that have an inventory output. They follow, track, monitor and evaluate  below KPIs(Key performance indicators) and take proactive and reactive actions to be a more competitive organization: ~Raw material stock coverage (day) ~Raw material stock (€) ~Semi-finished stock coverage (day) ~Semi-finished stock (€) ~Finished good stock coverage (day) ~Finished good stock (€) ~Materials in transit stock coverage (day) ~Materials in transit stock (€) ~Scrap Cost ~Lead time ~Headcount cost ~Overhead cost   I also like the article of “Lean Ofis” about The Impact of Stock Turnover, DSO and DPO on Profitability. [...]

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