When observing cash, in addition to seeing how much cash the company holds, financial experts will also examine an important dimension-cash structure.
1. Cash flow structure
In the cash flow statement, cash will be divided into three categories: cash flow for operating activities, cash flow for financing activities, and cash flow for investment activities. The ratio of these three types of cash flow is the cash structure.
Cash flow for operating activities is the cash flow generated by an enterprise through operating activities and sales activities. If the cash flowing in the enterprise is imagined as blood flowing in the human body, the cash flow of operating activities is the self-"hematopoietic function" of the enterprise. The cash flow of financing activities is mainly related to the financing activities of the enterprise, which is equivalent to an external "blood transfusion" to the enterprise. For example, if a company obtains a bank loan, the cash flow of financing activities will increase accordingly. However, when the company pays interest regularly or repays the principal, a part of this cash will flow out of the company. The cash expenditure generated by corporate investment will be classified into the cash flow of investment activities, which is equivalent to the company's "bloodle". Which of the three types of cash flows is the most important?
The cash flow of operating activities is the most important because it reflects the ability of a company to accumulate itself and provide sufficient funds.
has talked about the financial allocation issues of railway companies before. When the transportation is completed, the railway company's profits will increase, but since the customer has not actually paid, the railway company's cash flow has not increased at all. After a period of time, if the customer pays the railway company, the railway company's cash will increase accordingly, that is, cash and profits will converge.
But if the customer is unreliable and the railway company cannot receive cash for a long time, the difference between the cash and profit generated by this business will exist for a long time, that is to say, the profit content of this business is very low. In financial analysis, the ratio of cash flow and profits of operating activities is used to measure the value of profits. The higher the ratio, the higher the quality of profits.
2. The importance of cash flow status and operating characteristics ratio
Baote’s certain amount of cash flow for operating activities is important, but let’s think about it again. If the cash flow for operating activities is negative, does it mean that the company has no hematopoietic function and will definitely go bankrupt soon?
If you pay attention to the P0 (initial public offering) approval in recent years, you will find that companies approved for listing, especially among companies listed on the GEM and Science and Technology Innovation Board, some companies have negative cash flow for operating activities for several consecutive years. For example, Kelan Software was listed on the GEM in 2017. However, in the three years before its listing, its cash flow of operating activities continued to be negative, and in 2015 it reached
html to -101 million yuan. For example, Ningbo Rongbai New Energy Technology Co., Ltd., one of the first companies listed on the Science and Technology Innovation Board. This company is mainly engaged in the research, development, production and sales of lithium battery positive electrode materials and their precursors. Its prospectus shows that from 2016 to 2018, Rongbai Technology's cash flow of operating activities was -62.8796 million yuan, -637.6665 million yuan and -542.8214 million yuan, respectively.Why can companies with continuous negative cash flow in operating activities also go public? Have the approval standards for IP0 been relaxed? Actually not.
The main reason is that when evaluating the financial status of the applicant company, especially the company that applies for listing on the GEM and Science and Technology Innovation Board, relevant institutions no longer only focus on the positive and negative cash flow and also consider the degree of proportion between the company's financial status and its development stage and operating characteristics. Since these are technologically innovative enterprises, relevant institutions and investors are more concerned about the future continuous growth ability of these enterprises and whether they truthfully disclosed financial data that meets their operating conditions when applying for listing. It is obviously inappropriate to use "hard" financial indicators as the only assessment criteria.
Note that I used the word "match ratio" again, which shows how important a concept is in finance.
continues to take Rongbai Technology as an example. Although the company's operating activities were negative in the first three years of listing, its business development momentum was very strong and its revenue continued to rise. According to the information disclosed in the company's prospectus, in 2017 and 2018, its main business revenue increased by 111.83% and 60.33% year-on-year respectively.From 2016 to 2018, Rongbai Technology's main business revenue accounted for about 99% of its operating income. It can be seen that this is an enterprise that is very focused on its main business.
Why is Rongbai Technology’s annual income increasing, but its cash decreases? Does this fit its business characteristics?
credit sales will cause a difference between sales revenue and cash. When we refer to Rongbai Technology's customer information, we found that its customers are mainly large power battery manufacturers at home and abroad, and the customer concentration is very high. According to the information disclosed in the company's prospectus, from 2016 to 2018, the sales amount of the company's top five customers accounted for 60.40%, 61.28% and 52.79% of the current operating income, respectively.
When customers are the leading companies in the industry and the sales concentration is high, Rongbai Technology has weak negotiation capabilities and the credit sales ratio in revenue will be relatively high, which is reflected in the financial statements that there are high accounts receivable. At the same time, customers will require a relatively long payment cycle, so that Rongbai Technology will receive less cash in the current period.
In fact, according to the prospectus of Rongbai Technology, as of the end of 2016, the end of 2017 and the end of 2018, the balance of accounts receivable of Rongbai Technology was RMB 332.3611 million, RMB 806.1921 million and RMB 1145.4361 million, respectively, accounting for 37.55%, 42.91% and 37.66% of the current operating income, respectively. Rongbai Technology also admitted in its prospectus: "With the company's business scale expanding, accounts receivable have increased significantly, and some customers' accounts receivable recovery cycle is longer." To make matters worse, Rongbai Technology's products have a long production cycle and complex production process. In order to cooperate with the rapid development of the business and meet the needs of customers, the company needs to increase inventory. According to the information disclosed in the company's prospectus, Rongbai Technology's related cash expenditure in purchasing raw materials required for production increased from RMB 380.5651 million in 2016 to RMB 160.89265 million in 2018. When most of the sales revenue is accounts receivable and the company has to spend a lot of cash to increase inventory, this will obviously put a lot of pressure on the cash flow of operating activities. This can explain why Rongbai Technology has more and more revenue, but its cash flow in operating activities has become less and less, and even negative numbers have occurred.
The financial information and business characteristics of an enterprise are mutually verified, which is a very important way of thinking in financial statement analysis. Because although the purpose of financial statements is to present the real operating conditions of the company, financial data can be manipulated artificially. Before we make any judgments on enterprises based on financial information, we need to ensure that the business logic behind the data makes sense, otherwise there may be suspicion of fraud, or the company will do one thing.
Rongbai Technology's cash flow status can be explained by its operating model. Therefore, the negative cash flow in operating activities does not mean that Rongbai Technology is a bad company, but it can only mean that the company's financial pressure is quite large. If Rongbai Technology cannot alleviate cash pressure, there are still great risks. Therefore, when evaluating Rongbai Technology's cash situation, financial experts will further think about two issues. The first question is about the present. If the cash generated by Rongbai Technology itself cannot support itself, it will have the ability to use external financing, that is, "blood transfusion", to maintain the cash level within a safe range.
Has Rongbai Technology done it? The company's prospectus disclosed that from 2016 to 2018, the company received loans of RMB 82.3859 million, RMB 8.8728 million and RMB 253.5635 million respectively, so the company's cash flow in the past three years of financing activities was positive. In addition, once it is successfully listed, the company can immediately inject a large amount of cash, which will also help alleviate the cash pressure of Rongbai Technology. The second question is about the future. Can Rongbai Technology have enough cash to support itself in the future? The answer to this question depends on two points: "How fast will the future development be", "Can we recover the money owed by customers in the future". A large amount of funds are occupied by customers, which is obviously not conducive to the long-term development of the company. Therefore, the management ability of accounts receivable is crucial to Rongbai Technology.
Rongbai Technology promised in its prospectus: "The company will continue to optimize its customer structure and shorten the recovery cycle of accounts receivable."If Rongbai Technology can fulfill its promise, its financial pressure will be effectively alleviated; on the contrary, the pressure on its future cash flow will further increase.
3. The relationship between cash structure and the life cycle of the enterprise
In fact, Rongbai Technology's cash status is not an isolated case. Many companies in the startup stage have their cash structure in Rongbai Technology: the cash flow of operating activities and investment activities are negative, and only the cash flow of financing activities is positive.
The cash structure of the enterprise has a lot to do with the life cycle stage of the enterprise. The cash flow of the operating activities of the start-up is usually negative. For these companies, we do not need to over-emphasize the negative cash flow of their operating activities, but we need to pay attention to whether the enterprise has the ability to raise funds. .
In addition, there is another type of enterprise's cash flow for operating activities that is usually negative. This type of enterprise is in a recession period. Their main business is already in danger, so negative cash flow for operating activities will appear. At this time, investors need to be vigilant.
4. The impact of OPM strategy on cash flow
Rongbai Technology has faced customers that are leading enterprises in the industry, so its negotiation ability is weak, which leads to a great pressure on the cash flow of enterprises. On the contrary, those leading enterprises can occupy the supplier's funds for free, and their cash flow for operating activities is usually very abundant. In financial work, people often use the "cash conversion cycle" indicator to measure whether a company's OPM strategy is successful. ① Cash conversion cycle The calculation formula is as follows:
Cash conversion cycle = Accounts receivable turnover days + Inventory turnover days - Accounts payable turnover days
Accounts receivable turnover days and inventory turnover days refer to the speed of the enterprise's collection, and the number of accounts payable turnover days refers to the speed of the enterprise's payment. The shorter the cash conversion cycle of the enterprise, it means that the faster the enterprise collects money, the slower the payment", that is, the faster the speed of taking money from others than giving money to others, the more successful its OPM strategy is, the less pressure on cash flow. However, OPM strategy is a "double-edged sword", and excessive use can also bring great operating risks to the enterprise. In a survey report released by the US REL consulting company and CFO magazine pointed out that the ability of enterprises to use OPM strategies requires customers and suppliers The cooperation, especially during the economic downturn. Companies must be able to fully gain the trust of suppliers in order to use OPM strategies to improve profitability. Their investigation report released in 2002 was titled "Don't let the supply chain break" and pointed out the importance of customer-supplier relationship management.
Although Gome and Suning both used OPM strategies to expand, Gome did not pay attention to supplier relationship management in the process of creating its chain empire, because they did not pay attention to supplier relationship management, they charged suppliers high entry fees, advertising fees, etc., and gradually deteriorated their relationship with suppliers. Later, large manufacturers such as Siemens and Sony began to conduct cash spot transactions with Gome. Large manufacturers such as Midea Group and TCL Group, which did not receive the same treatment, and some manufacturers of second- and third-tier brands, also began to attack Gome. The tense relationship with suppliers, the financial pressure brought by expansion, and the arrest of former Gome executives, eventually led to Gome being in a passive situation where they were run by suppliers. In contrast, Suning is better at maintaining relationships with suppliers, which occupies relatively little capital and shorter time. During the rapid expansion, there is no over-reliance on occupying supplier funds. From 2008 to 2010, when Suning was struggling with the quagmire of financial difficulties, it implemented a positive and stable financial strategy, which effectively supported its own surpassing Gome.
