Niko Tech Case: The contribution of DPO to the change in the value of cash-to-cash cycle

 The contribution of the days payable outstanding (DPO) to the change in the value of Niko Tech's cash-to-cash cycle 

The days payable outstanding (DPO) of Niko Tech were 105.06 in the first year (Gardner, 2014). That was the number of days that the company used to pay off its financial obligations such as paying the suppliers for the supplies they had already made to the company and the payment of the short time financial lending the company had received. The DPO increased to 106.05 days in Y2 (Gardner, 2014). The increase signified an increase in the length of the duration of time that the company was taking to clear its short-term financial obligations. 

On the other hand, the length of the cash to cash cycle for Niko Tech stood at 249.21 days in Y1 (Gardner, 2014). That represented the number of days that the company spent to release all the cash tied in the cash generating and the cash consuming projects of the business. Niko Tech recorded an increase in the length of the cash-to-cash cycle in Y2 to 291.16 days. The increase in the number of days was an indicator that the efficiency of the company in realizing the invested cash had reduced (Gardner, 2014). 

The accounts payables are treated as liabilities on a company's balance sheet. Therefore, the DPO becomes an essential aspect in the determination of the days that the company takes to meet its financial obligations and realize the initially Invested cash. In as much as the increase in the DPO from Y1 to Y2 may be advantageous to Niko Tech concerning holding the cash for longer to maintain free cash flow, it significantly increases the time used by the company to realize its invested cash back. That, in turn, leads to the decrease in the intensity of the investment projects at the company. The increase in the DPO, therefore, has multifaceted effects on the cash flow of the company. The increase in the length of the cash-to-cash cycle at Niko Tech has also significantly reduced the freedom of the cash flow in the company. That has led to the reduction in the business opportunities that the organization may take part in to increase its accounts receivables. Thus, the increase in the DPO has caused a negative implication to the length of the cast to cash cycle. 

Inventory Turnover for Y1 and Y2 

The inventory turnover at Niko Tech is a measure of the number of times that the company has sold or replaced its inventory. In Y1, the inventory turnover for Niko Tech was 2.06 times. The value reduced to 1.88 times in Y2 (Gardner, 2014). From the outlook, the company has relatively had weak sales over the two years, with the sales deteriorating in the second year compared to the first year. In the first year, the company recorded a higher inventory turnover due to the following possible reasons. One of the reasons for the effectiveness of marketing strategies implemented in the company. The second reason is the presence of more discounts for the target customers. Both of these possible reasons had weakened applications by Niko Tech in the second year, which led to a slight reduction in the inventory turnover (Gardner, 2014) 

Expression of Inventory Turnover Concerning Days of Inventory 

The inventory turnover measured the company's efficiency in the sale of the products to the target market. Comparatively, Niko Tech was more efficient in its sales in the first year than in the second year. The following is the formula for the calculation of the inventory turnover that Niko Tech followed. 

Inventory turnover = cost of goods sold/average inventory 

The inventory turnover is calculated based on an entire fiscal year at Niko Tech, which has 365 days. Therefore, the days that the company spent to sell its entire inventory can be given by: 

Days of inventory = 365/inventory turnover 

Using the formula above, the days of inventory in Y1 can be given as: 

Days of inventory = 365/2.0625 

=176.9697 days 

While the days of inventory in Y2 can be given as: 

Days of inventory = 365/1.877273 

= 194.4310 days 

Change in inventory turnover as a positive or negative indication of inventory management performance 

The change in the inventory turnover from Y1 to Y2 at Niko Tech has taken a negative trend regarding the number of times that the inventory of the company is sold or replaced. That has a link to the management performance of the inventories at the company. A higher inventory turnover value at the company indicates a faster rate of the sales of the products by the company such as in Y1 as compared to the lower value that was obtained in Y2. The more the products are sold at the company, the more efficient the inventory management performance is at Niko Tech. The slowing down of the rate of sale of the inventory is an indicator of the inefficient inventory management at the company, and therefore the goods have had to stay longer at the company. 

Net Profit Margin 

The net profit margin is a measure, which indicates the profit of each dollar that the company has generated in sales. The net profit margin is also known as the net margin. The net margin for Niko Tech was 1.68% in Y1 (Gardner, 2014). The net margin lowered to 0.68% in Y2. The reduction in the net margin in Y2 in comparison with Y2 is a clear indicator of the drop in the efficiency of generating profits from the company's sales. The decline in the net margin, additionally, indicates that the net income of the company has suffered a drop. That has happened despite the increases in the sales of the company in Y2 compared to Y1. That suggests that in as much as the revenue of the company is growing; there is reduced efficiency in the generation of the profits from the sales (Gardner, 2014). 

Asset Turnover 

The asset turnover ratio is yet another ratio that indicates the efficiency of the company's investment decisions. The asset turnover ratio at Niko Tech is an indicator of how the firm is deploying its assets to generate revenue. The asset turnover ratio in Y1 was 0.94 (Gardner, 2014). The asset turnover ratio in Y2 rose to 1.04. The increase in the ratio was an indicator of the company's rise in the efficiency of the deployment of its assets to generate revenue in its investment process. The company, in Y2, was generating a revenue of $ 1.04 per $ 1.00 of assets compared to the $ 0.94 made as revenue for the same amount in assets in the previous year (Gardner, 2014). 

Return on Assets 

The return on assets (ROA) is a measure of the profitability of Niko Tech based on its total assets. The ROA of the company in Y1 was 1.58 % (Gardner, 2014). That stated that every dollar that was used to purchase assets at Niko Tech generated a profit of 1.58%. The ROA deteriorated in Y2 and was 0.71%. The ROA of the company is low which indicates the low profitability of the company in the two years. The reduction in the net income from Y1 going on to Y2 has contributed to the massive drop in the company's profitability according to the calculations of ROA. The company has had a reduction in its efficiency in investing from the assets it has. Such a trend would keep the potential investors and creditors away from the company (Gardner, 2014). 

Effects of Net Profit Margin and Asset Turnover on the Return on Assets 

The net profit margin, assets turnover ratio and the return on assets are all ratios that indicate how efficient Niko Tech is in its investment calculations. The net profit margin looks into the net income and its relationship with the total revenue of the company. The decrease in the net profit margin in the company from a 1.68% in Y1 to 0.68 in Y2 is an indicator of the effect that the net income can have on the net margin regardless of the increase in the assets of the company (Gardner, 2014). Summatively, the decrease in the net margin despite the rise in the assets is instead a suggestion of the decline in the investment efficiency. Therefore, the net profit margin is a driver for the change in the return on assets. The asset turnover, in this case, has not had a notable effect on the trend in return on assets since it does not account for the change in the net income of the company. The asset turnover ratio records an increase from the 0.94 in Y1 to 1.04 in Y2. That has been contributed to by the growth in both the total assets of the company and the sales (Gardner, 2014). 

Principal financial factors that account for the downward trend in this measure 

The net margin is the primary driver of the ROA and the changes it has had at Niko Tech for the two years. One of the principal financial factors that account for the deterioration of the ROA in the company in Y2 compared to Y1 is the downward trend in the net income of the company. The increase in the revenue of Niko Tech in Y2 from Y1 has been coupled with a significant increase of 50% in the cost of goods sold, and the other costs of running the business have considerably risen (Gardner, 2014). The rise in the costs in the operations of the company has led to the constriction of the net income in Y2. Since the ROA uses the net income as one of its calculation components, the change has led to a significant drop in ROA. The other principal financial factor that has dictated the trend of ROA at Niko Tech is the unproductivity in some of the assets that the company owns. Despite the increase in the value of the assets of the company in Y2, there has been a decrease in the efficiency of investing using the assets. That has led to the lowering of the ROA (Gardner, 2014). 

The Trend in the Measures of Niko Tech's Supply Chain Velocity 

Operating cycle 

In the fiscal year Y1, Niko Tech recorded an operating cycle of 249.21 days. The operating cycle extended in Y2 to hit 291.16 days (Gardner, 2014). The increase in the operating cycle of the company was an indicator of the rise in the time taken by the company to make the corporate decisions that would apply to the investment in the company. The time taken to realize the cash in the investment process has an effect on the speed of the supply chain in a company such as the delivery of the finished products to the target market (Kristianto, Gunasekaran, Helo, & Hao, 2014). Therefore, an increase in the length of the operating cycle in Y2 compared to Y1 was an indicator of the rise in the time taken to deliver the products to the target market. That was set to reduce the company's profitability and the efficiency that the company is expected to have in the production and delivery processes (Kristianto et al., 2014). Therefore, the increase in the length of the operating cycle at Niko Tech from Y1 to Y2 had a reduction effect on the velocity of the supply chain in the company (Gardner, 2014). 

Cash-to-cash cycle 

Both The cash generating and the cash consuming projects at Niko Tech have various effects on the cash flow of the company. In Y1, the cash-to-cash cycle was 144.13 days (Gardner, 2014). That was the number of days that the company took to realize its cash back from the generation and consumption projects at Niko Tech. The following year had a lengthening in cash to cash cycle to stand at 185.11 days (Gardner, 2014). The increase in the cash-to-cash cycle indicated a slowed process of investment in the company and the realization of the cash that had been invested in the company's projects in that year (Hofmann, 2017). The increase in the time of untying the cash reduced free cash flow in the company and therefore the company could not have a rapid production and delivery process in the market. That affected the slowing down of the supply chain velocity, which has a relationship with the rate of return on the realization of the cash from the investment activities at Niko Tech (Hofmann, 2017). 

References 

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. 

Hofmann, E. (2017). Big data and supply chain decisions: the impact of volume, variety and 

Velocity properties on the bullwhip effect. International Journal of Production Research , 55 (17), 5108-5126. 

Kristianto, Y., Gunasekaran, A., Helo, P., & Hao, Y. (2014). A model of resilient supply chain 

Network design: A two-stage programming with fuzzy shortest path. Expert systems with applications , 41 (1), 39-49. 

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