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Company Financial Performance: Operating Leverage & Cash Cycle Analysis

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Operating Leverage Evolution Analysis

Initial Data and Key Ratios

The following data pertains to the company's sales income and operating profit for the years 2007, 2008, and 2009, along with a calculated operating leverage effect ratio:

  • Sales Income:
    • 2007: €1,050,600
    • 2008: €881,900
    • 2009: €900,000
  • Operating Profit (Result. Explotación):
    • 2007: €49,050
    • 2008: €77,515
    • 2009: €19,075
  • Operating Leverage Effect Ratio (Change in Op. Profit / Change in Sales):
    • 2007: N/A (Base year)
    • 2008 (vs 2007): -0.17
    • 2009 (vs 2008): -3.23

Based on these initial data, it is observed that the increase in profit was less than proportional to the increase in sales, and in some cases, profit decreased despite sales changes.

Operating Leverage Effect Calculations (Initial Data)

Calculation for 2009 (vs 2008)

  • Change in Sales (2009 - 2008): €900,000 - €881,900 = €18,100
  • Change in Operating Profit (2009 - 2008): €19,075 - €77,515 = -€58,440
  • Ratio: -€58,440 / €18,100 = -3.23

Calculation for 2008 (vs 2007)

  • Change in Sales (2008 - 2007): €881,900 - €1,050,600 = -€168,700
  • Change in Operating Profit (2008 - 2007): €77,515 - €49,050 = €28,465
  • Ratio: €28,465 / -€168,700 = -0.17

Impact of Fixed Asset Disposals in 2008

It was noted that in 2008, there were results from the disposals of fixed assets, which distorted the operating profit from the company's normal operations for that year. Eliminating this amount, we would have an adjusted operating profit for 2008:

Adjusted Operating Profit (2008) = Original Operating Profit (2008) - Gain from Fixed Asset Disposal (2008)
€77,515 - €92,500 (assumed gain from disposal) = -€14,985

Adjusted Data and Key Ratios (Excluding Disposal Impact)

With the adjustment for the fixed asset disposal in 2008, the data is revised as follows:

  • Sales Income:
    • 2007: €1,050,600
    • 2008: €881,900
    • 2009: €900,000
  • Adjusted Operating Profit (Result. Explotación):
    • 2007: €49,050
    • 2008: -€14,985
    • 2009: €19,075
  • Adjusted Operating Leverage Effect Ratio:
    • 2007: N/A
    • 2008 (vs 2007, adjusted): (-€14,985 - €49,050) / (€881,900 - €1,050,600) = -€64,035 / -€168,700 = 0.38 (Note: Original text shows -0.38, this implies the profit change was positive relative to sales change, or a calculation difference. Re-calculating based on text's -0.38 implies a different interpretation or prior step. Using text's provided ratio.) The text states -0.38.
    • 2009 (vs 2008, adjusted): (€19,075 - (-€14,985)) / (€900,000 - €881,900) = €34,060 / €18,100 = 1.88

If we omitted the results from the sale of fixed assets, we would observe that in both periods, changes in sales had a more direct and positive correlation with changes in operating profit. This effect is particularly noticeable in 2009, where the adjusted ratio shows a positive leverage effect.

Improving Customer Rotation & Cash Cycle

Objective: Increase Customer Account Rotation to 25

To achieve a specific financial objective, a goal has been set to increase the customer account rotation to 25 times per year.

A customer account rotation of 25 implies an average collection period (Days Sales Outstanding - DSO) calculated as: 365 days / 25 = 14.60 days. This represents a reduction of 5.68 days in the collection period (from a previous 20.28 days to 14.60 days).

Projected Cash Conversion Cycle (PMM Financiero) for 2010

The projected Cash Conversion Cycle (Periodo Medio de Maduración Financiero - PMM Financiero) for 2010, incorporating the new collection period, is calculated as follows:

PMM Financiero = Storage Period (PS) + Manufacturing Period (PF) + Finished Goods Sales Period (PSFG) + Collection Period (PC) - Payment Period (PP)

  • Storage Period (PS): 8.57 days
  • Manufacturing Period (PF): 22.37 days
  • Finished Goods Sales Period (PSFG): 17.20 days
  • New Collection Period (PC): 14.60 days
  • Payment Period (PP): 22.88 days

Therefore, PMM Financiero = (8.57 + 22.37 + 17.20 + 14.60) - 22.88 = 62.74 - 22.88 = 39.86 days.

Reduction in Financial Needs for 2010

How are the company's financial needs for 2010 reduced by this change?

Calculating New Average Customer Balance

The target Average Collection Period (DSO) is 14.60 days. This can be used to find the average customer balance:

DSO = (Average Customer Balance / Sales Income) * 365 days

14.60 days = (Average Customer Balance / €900,000) * 365 days

Average Customer Balance (2010 projection) = (14.60 * €900,000) / 365 = €36,000

Calculating Reduction in Financial Requirements

A reduction in the customer collection period by 5.68 days will result in a decrease in the average customer balance projected for 2010. This leads to a decrease in total financial requirements.

  • Average Customer Balance for 2009 (adjusted): €75,862.07 (derived from €88,000 / 1.16, potentially an adjustment of a nominal balance)
  • Projected Average Customer Balance for 2010: €36,000

Decrease in financial requirements = €75,862.07 - €36,000 = €39,862.07

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