Cash Conversion Cycle Analysis: Review Of Ford Motor Company (Essay Sample)

Cash Conversion Cycle Analysis
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Review of Ford motor company
Ford motor company is an example of a product-based company that deals in the automotive industries. Based in the United States, Ford motor company has its branches extending across the globe as it is widely renown supplier and producer of automobiles as well as different vehicles. On a different note, the corporation is one of the most profitable multinational companies considering its tremendous growth and expansion. Over the years, Ford motor company has risen as one of the most leading companies to experience growth in revenue collection. An analysis of their 2016 financial statements shows their 2016 economic activities as well as the revenue they collected among many other financial activities they were involved in about cash conversion cycle.
To begin with, 2016 was an excellent financial year considering that the company experienced an increase in revenue collection as compared to the revenue that they collected in the year 2015 (Ford Motor Company, 2017). In detail, the company saw an increase in revenue collection from 140.6 billion dollars in 2015 to 141.5 billion dollars in the year 2016 (Ford Motor Company, 2017). On a different note, the operating margin of Ford motor company reduced from 6.8% to 6.7%. Furthermore, their operating cash flow also experienced a reduction from 7.3 billion dollars in 2015 to 6.4 billion dollars in 2016. Looking at Ford motor company credit as is presented in their 2016 annual report, net income also decreased (Ford Motor Company, 2017). In 2015, for instance, the company had a net profit of 7.4 billion dollars, and it reduced to 4.6 billion dollars in 2016 (Ford Motor Company, 2017). That was a significant decrease which serves as an indication that despite the increased revenue collection, Ford’s activities might not be as intense as they were in the previous years. Adjusted pre-tax profit also reduced from 10.8 billion dollars 10.4 billion dollars (Ford Motor Company, 2017). As the executive chairman of the company notes in the 2016 annual report, the financial setbacks that the company experienced in 2016 did not deter the company from achieving its goals of launching new vehicles considering that the company started eleven cars in 2016. Moreover, the company took a tremendous step towards enhancing environmental conservation by launching 13 electric vehicles (Ford Motor Company, 2017). All in all, the CEO who is also the company’s president Mark Fields shares the same sentiments that despite the financial setbacks, it was an excellent fiscal year considering that revenue collected increased despite the drawbacks in the other commercial sectors.
Production Cycle
Annual cost of sales/Average inventory level
135,087,000/452,960,000
0.298%
Average inventory
From The first quarter of 2016, average inventory turnover ratio was 26.64%.
Inventory turnover rate
Inventory turnover rate for the first quarter of 2016 was 12,324 million dollars.
Collection Cycle
Days sale outstanding + Days inventory – Days payable =
26 + 27 – 65
= -12
Average accounts receivable
=Days sales outstanding
As of December, 2016= 26.94%
Accounts receivable turnover
As of March, 2016= 13.45%
Payment Cycle
21,296 million dollars
Average accounts payable
21,296 million dollars
Accounts payable turnover
Current assets + Current Liabilities
108461 + (less) 90281
= 18, 180 million dollars
What is the company's Cash Conversation Cycle?
Average inventory processing period-Average receivable collection period-Average payment period
26-29-62
= -7
Looking at the calculations carried out above, Ford motor company is bound to experience a reduction in gross profit that is received. Despite the year 2016 has seen an increase in the amount of revenue collected, the total cost of revenue is high. Thus, the gross profit reduces. As compared to the performance of their competitors such as General Motors Co., Ford Motor company are disadvantaged. Moreover, the conversion cycle shows that the cash flows of the company are inferior in performance. As compared to the cash flow of the preceding years, a lot needs to be done to improve the performance of the company.