Abstract
Measurement of performance in an organization is mainly based on the profitability and availability of cash for operations. Long-term profitability is a necessary component, but the availability of cash is a primary element of the day-to-day sustainability of these operations.
Net Cash from Operating Activities Vs Net Income
According to Libby, Libby and Daniel G (2008), operating cash flow is a more reliable measure of the long-term sustainability in performance, as compared to the net income. Long-term performance is best measured through assessment of the operating cash flow due to the following reason. First, net operating cash flow is harder to manipulate under the GAAP guidelines as opposed to the operating income (Williams, Carcello and Neal, 2008).
This is due to the fact that recognition of expenses and incomes under the estimation of net income is dependent on various organizations. However, the components of the net operating cash are a reliable measure regardless of the industry and organization. Secondly, cash is more reliable as opposed to earnings.
The ability of a company to generate cash is a more reliable measure than the ability to transform expenditure into income. Profits are accrued, meaning that companies which are profitable also require cash in hand to finance operations. Failure to generate cash in the long term contributes to inability to operate, resulting to the death of organizations.
Data under Review: Yum Brands Inc, Panera Bread and Starbucks under Comparison
Comparison of the operating cash flows with other elements of performance in the company is done in order to indicate the sufficiency of cash flows (Williams, Carcello and Neal, 2008). In addition, the level of net operating cash flows and net income offers an indication of the aspects of performance of the company. Yum Brands Inc. has experienced a reduction in the net operating cash flows in 2007, while income increased slightly. Significant changes in the notes payables was observed over the two years, with a major reduction in the amount of the notes payable.
Panera Bread has significantly high levels of operating net operating cash flow and net income. Slight changes in the operating cash flow followed by significant increase in the proportion of operating cash flow and total debt indicates that there was a significant drop in the long term debt. Starbucks experienced significant decreases in the net income, with slight changes in the cash from operating cash flows. Other measures of performance experienced no significant changes.
Overall, Panera Bread and Starbucks offered no cash dividend, in spite of the high level of operating cash flow per share for Panera Bread. Yum Brands Inc offered an operating cash flow per cash dividend higher than the operating cash flow per share, indicating that they financed dividends from other sources.
Starbucks Experiences Cash flow Problems
Cash flows problems are indentified from dwindling profits. Future cash flows are sometimes the result of the net income, although operating cash flows are the better measure. However, an organization has to still generate incomes by charging prices higher than expenses. Cash flow issues include aspects such as reducing incomes as in the case of Starbucks. In addition to this, the company has low operating cash flow per share, resulting to no cash dividends finally.
Starbucks also has high proportion of operating cash flows to current maturities. In addition to this, the company has high level of commercial paper and short term borrowings, hence making it highly dependent on debt financing. Similarly, Starbucks experienced a reduction in the net cash from operating activities, especially due to the face that that there was a drop in this measure between the two years under comparison.
References
Libby, R., Libby, P & Daniel G. (2008) “Short Financial accounting” McGraw-Hill Irwin, New York: Cornell University.
Williams, J. R, Carcello, J. V and Neal, T. L. (2008). GAAP Guide Level A MILLER GAAP GUIDE Chicago: CCH.