Niko Tech Case: Calculation DOI, DRO, Operating Cycle

Days of Inventory (DOI) 

The days of inventory at Niko Tech were 176.97 in the first year. The value represented the number of days that the company needed to turn its entire inventory into sales during its fiscal year. The DOI increased to 194.43 in the second year. The increase in the DOI value was attributed to the slowed down sales and activities. The promotional activities such as marketing and public relations at Niko Tech went down resulting in the reduced volume of sales (Charitou, Elfani & Lois, 2010). The increase in the DOI over the two years is also an indicator of the reduced financial performance of the company from Y1 to Y2. That would communicate the financial trend of the company to both the investors and the debtors who would like to be shareholders in the business activities of the firm (Charitou, Elfani & Lois, 2010). 

Days of Receivables (DRO) 

The days of receivables that Niko Tech required to fully collect its cash generated from sales in the first year Y1 was 72.24 days. That was relatively efficient for the company in its industry although the company would have improved its investing activities to realize its cash from sales in a much shorter time (Kwon, Han & Chung, 2018). The following year, Y2, the days of receivables of Niko Tech rose to 96.73 days. The addition of the number of days used to realize the cash obtained from the company's sales indicated a decreased efficiency in the investment of the company in Y2 as compared to the previous year. That could have been associated with the reduced number of projects that the company had to undertake in the second year, which were noticeably less than the first year's projects were (Kwon, Han & Chung, 2018). 

Length of the Operating Cycle 

The length of the operating cycle is a business performance ratio that indicates the efficiency of a company's management (Park, 2016). The operating cycle of Niko Tech in Y1 was 249.21 days. The length of the operating cycle is average in the company's sector. The operating cycle of Niko Tech in the following year was 291.16 days (Gardner, 2014). The increase in the cycle was an indicator of the reduced efficiency of the management to make corporate decisions that would facilitate investments at the company. The longer the operating cycle for the company, the more risk there is for the company to hold the cash (Park, 2016). Therefore, in the first year, there was less risky in the company compared to the second year (Gardner, 2014). 

Days of Payables (DPO) 

Some of the funding at Niko Tech comes from the trade creditors who include suppliers. Sometimes, the company does not pay its suppliers immediately they deliver the materials required, they may have to wait for a time. The days of payables for Niko tech in Y1 were 105.08 days (Gardner, 2014). That was the number of days that the company took to pay its trade creditors in the financial year completely. In Y2, Niko Tech had days of payables of 106.05 days (Gardner, 2014). From the outlook, the company has taken average time in the clearance of debts in the two years. However, the increase in the days of payables as the company crossed Y2 from Y1 is an indicator of the slight reduction in the efficiency of management of cash flow at the organization. On the other hand, the longer that the company takes to pay off its creditors such as is the case in the second year means that the company retains more cash at hand, which can be used to conduct its short-term business activities. That is supposed to increase the working capital of the company and maintain free cash flow in the operations (Gardner, 2014). 

Length of the Cash-to-cash Cycle 

The cash in a company may also be tied up in the significant consumption and production areas of cash in the firm. In the case of Niko Tech, the cash may be tied up in a cash-consuming area such as accounts payables or cash producing area such as accounts receivables. The length of the cash-to-cash cycle at Niko Tech in the first year was 144.13 days (Gardner, 2014). That was the number of days that the company used to free up all the tied up cash in the cash flow operations of the business. The following year, the cash-to-cash cycle became longer and was at 185.11 days (Gardner, 2014). The increase in the number of days suggested inhibition of free cash flow within the business operations in the second year compared to the first year. The lack of sufficient flow of cash in the second year was also an indicator of the slow corporate activities in the company and the reduction of the intensity in investing that the company had in the previous year (Gardner, 2014). 

Reasons for Increasing of Costs of Goods Sold 

The cost of goods sold by the firm in the first year amounted to $ 990,000,000(Gardner, 2014). In the second year, there was an increase in the cost of goods sold at Niko Tech, and they amounted to $ 1,239,000,000(Gardner, 2014). That represented a 25% increase in the value of the cost of goods sold by the company. The increase in the cost of goods does not appear to be for the right reasons (Gardner, 2014). 

Firstly, the increase in the cost of goods sold at Niko Tech has led to a significant reduction in the net income obtained from the company's operating activities. The net income is usually a difference between the revenue collected by the company from the operating activities and the cost of the goods sold. The rate of increase in the cost of goods at Niko Tech was higher than that of the increase in the revenue collected. Therefore, Y2 recorded a 50% reduction in the net income (Gardner, 2014). That meant that the profitability of the company was on a downward spiral in the second year compared to the first year. 

Secondly, the increase in the cost of goods sold at Niko Tech reduces the free cash flow in the company. The addition of the cost of goods sold leads to a rise in the accounts payable and a notable reduction in the accounts receivables. The increase in the amount recorded under accounts payable increases the number of days of payables. It means that the company has to take more days than it has been to clear all its financial obligations, mostly the short-term ones. Since there is higher spending in the company to pay off its credit, the more the days, the more the disadvantage they have for the company's cash flow in its operations. 

Had the cost of goods sold at Niko Tech been increasing for the right reasons, the increase would have been at most 5% over what the company spent during the previous year. That can be represented as follows. 

Original cost of goods sold = $ 990,000,000 

Increase in percentage = 5% 

New cost of goods sold = $ 900,000,000 + ($ 990,000,000 × 5/100) 

New cost = $ 945,000,000 

Assuming that the revenue remained constant, the net income for the company in Y2 would have increased due to the extra money saved by the firm. 

Effects of Average Inventory and COGS on Driving the Y1-Y2 Trend in DOI for Niko Tech 

The calculations for the days of inventory are contributed to by the average inventory and the costs of goods sold at Niko Tech. The changes in the inventory of the company from Y1 to Y2 had a notable effect on the trend of DOI in the two financial years. The inventory was valued at $ 480,000,000 in Y1 and shot to $ 660,000,000 in Y2 (Gardner, 2014). The inventory usually has an adverse effect on the cash balance of an organization (Charitou, Elfani & Lois, 2010). The increase in inventory hence represents an increase in the negative cash balance on the financial statements of Niko Tech. The changes in the inventory at the company have had effects on the inventory turnover. For instance, during Y1, the inventory turnover was higher than that of Y2. Thus, the days of inventory increased from 176.97 in Y1 to 194.43 in Y2 (Gardner, 2014). Therefore, the increase in the inventory has an increment effect on the days of inventory to the company. However, the increase in the average inventory is not entirely responsible for the increase in the days of inventory. The changes in the cost of goods sold have also influenced the DOI a great deal (Charitou, Elfani & Lois, 2010). 

The cost of goods sold in Y1 amounted to $ 990,000,000(Gardner, 2014). The cost of goods sold rose in Y2 and totaled at $ 1,239,000,000(Gardner, 2014). The addition of the cost of goods sold increases the deductions from the company's cash balance just as the increase in the average inventory does. Being a liability, the increase in the cost of goods between Y1 and Y2 leads to the decrease in the cash that is available for the carrying out of all the company's operations. Therefore, the current business operations are going to take longer for their sales to be achieved as seen in Y2 more than they would in Y1. That increases the number of days of inventory (Charitou, Elfani & Lois, 2010). The increase in the DOI is therefore contributed to by the increase in the cost of goods sold. The company, according to Charitou, Elfani & Lois (2010), treats both the average inventory and the cost of goods sold as liabilities. Therefore, both of their increases have led to the rise of the days of inventory from Y1 to Y2. 

Effects of Net Sales and Average Receivables on the Y1-Y2 Change in DRO 

To record an increase in the accounts receivables of the company, Niko Tech has to ensure that all the sales are finalized. The days of receivables are then calculated after the company has realized all the sales from investment ideas. The DRO in Y1 was 72.24 days (Gardner, 2014). The number of days of receivables increased to 96.73 in Y2. The net sales of the company also recorded an increase in Y2 compared to Y1. The increase in the net sales was contributed to by the increase in the revenue. Therefore, the increase in the net sales over the two years increased the money to be received by the company. Thus, there had to be extra days to collect it all (Kwon, Han & Chung, 2018). The average receivables of the company also increased from Y1 to Y2. The increase in the average receivables had the same effect as the increase in the net sales. At the constant rate of the company's investment, the additional days were necessary to collect the extra sales that were identified as receivables by Niko Tech in Y2. The increase in the days of receivables would nonetheless be interpreted as inefficiency on the side of the company's management (Kwon, Han & Chung, 2018). 

The Impact on DRO of the Change in Returns and Allowances between Y1 and Y2 

The days of receivables have various impacts on the changes in the returns and allowances. The more the DRO period is, the more time there is for the customers to return the defective products and the company giving them allowances on the damaged products as well(Kwon, Han & Chung, 2018). Therefore, there were fewer possibilities for the returns of the defective and unappealing goods back to the company in Y1 where the DRO of the company stood at 72.24 days (Gardner, 2014). In comparison to the DRO for Y1, Niko Tech recorded a DRO of 96.73 days (Gardner, 2014). The company had lengthened the time of the recording the average accounts receivables for the firm. That led to an increase in the return of the defective products and the granting of allowances to the customers who preferred not to return the goods (Gardner, 2014). 

References 

Charitou, M. S., Elfani, M., & Lois, P. (2010). The effect of working capital management on 

Firm’s Profitability: Empirical evidence from an emerging market. Journal of Business & Economics Research , 8 (12), 63-68. 

Gardner, D. L. (2014). Measuring Results: Niko Tech, Inc. In Supply Chain Vector: Methods for Linking the Execution of Global Business Models with Financial Performance (pp. 157-172). Boca Raton: J. Ross Publishing, Incorporated. 

Kwon, O. K., Han, H. N., & Chung, H. M. (2018). Evaluation of Supply Chain Financial 

Performance from the Perspective of Balance, Strength, and Resiliency. Journal of International Logistics and Trade , 16 (1), 21-31. 

Park, K. (2016). An Optimization Model of Yacht Service Supply Chain Using Particle Swarm 

Optimization and Cash-to-Cash Cycle. Advanced Science Letters , 22 (11), 3525-3528. 

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