1. Linking Supply Chain and Finance
Dr. David Gligor

16. What is Working Capital?
Amount of cash a company has tied up for just running the business
Minimum value is desirable
Working Captial = Current Assets – Current Liabilities
(Inventory, Accounts Receivable) (Accounts Payable)
 The more that is tied up, the less cash is available to do something else with, or the more a company has to borrow to fund its operations.

17. How to Decrease Working Capital?
Working Captial = Current Assets – Current Liabilities
(Inventory, Accounts Receivable) (Accounts Payable)
Decrease Current Assets
Reduce inventory
Reduce the time to collect money from customers
Increase Current Liabilities
Increase the time to pay vendors
Dell once had a negative working capital
Dell for awhile famously had negative working capital, having little inventory that it owned (it used a lot of JIT and consignment inventory, and used a make-to-order model) and was paid by credit card customers faster than it paid its vendors.

18. Impacts of Inventory on Financial Statements
A key indicator of supply chain excellence
A key driver of total logistics cost is the cost of holding inventory
Financial Statements under consideration:
Balance sheet
Cash flow statement
Income statement
 Inventory is the main focus here, a key indicator of supply chain excellence, the area where supply meets demand. 

19. Let’s say we reduce inventory by 10%
Let’s consider a company with avg. inventory = $1 billion
Through various initiatives, planning to reduce inventories by 10%, or $100 million

20. Impact on Balance Sheet
Reduction in Inventory Level = $100 Million (10%)
Initial Inventory Level = $1 Billion
Final Inventory Level = $0.9 Billion
Reduction in Current Assets = $100 Million
Reduction in Working Capital = $100 Million

21. Impact on Cash Flow Statement
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

22. Impact on Income Statement
The impact on the income statement is much trickier
Does having lower inventory improve profitability?
Several potential ways to calculate the impact on income statement:
Cost of borrowing money (assume interest rate is 5%)
=> Potential Impact = 5% of $100 million = $5 million
2. Cost of capital (assume 9%): Return shareholders expect from the company’s use of capital
=> Potential Impact = 9% of $100 million = $9 million
3. Inventory Carrying Cost (assume 19%): Interest Cost/Cost of Capital + All Inventory Associated Cost (Storage, Handling, Insurance, Taxes, etc.)
=> Potential Impact = 19 % of $100 million= $19 million

23. Impact on Other Financial Statements
Return on Assets(ROA) = Profit / Assets
Inventory => Assets => Return on Asset
Reducing inventory and improving cash flows has a positive impact on a company's valuation or stock price

24. Summary of Impact

26. Outline of Course 1. Assess the Financial Health of a Firm
Supply Chain Finance I
1. Assess the Financial Health of a Firm
Interpret Financial Statements
Evaluate Financial Performance
2. Plan Future Financial Performance
Financial Forecasting
Managing Growth
Supply Chain Finance II
3. Financing Operations
Financial Instruments and Markets
Financing Decision
4. Evaluate Investment Opportunities
Discounted Cash Flow Techniques
Risk Analysis in Investment Decisions