Walmart - Difference between Net Income and Net Cash Flow - Example

al Affiliation) FINANCE AND ACCOUNTING Task 3 (a) Cash flow from operating activities (millions of Dollars) 2013 Target 5,881 5,271 5,434 5,235 Walmart 23,643 24,255 25,591 23,257 As reflected in the above table, compared to Walmart, Target has had much higher cash flows over the past 4 financial years. This means that it is probably in a much better financial position compared to Walmart. b) Current assets (millions of Dollars) 2010 2011 2012 2013 Target 18,424 17,213 16,449 16,388 Walmart 52,012 54,975 59,940 61,185 Current liabilities (millions of Dollars) 2010 2011 2012 2013 Target 11,327 10,070 14,287 14,031 Walmart 58,603 62,300 71,818 69,345 Working capital and ratios (in brackets) 2010 2011 2012 2013 Target 7,097 (1.63) 7,143 (1.71) 2,162 (1.15) 2,357 (1.17) Walmart -6,591 (0.89) 7,325 (1.2) -11,878 (0.83) 8,160 (0.88) From the above figures it is clear that Target has managed its working capital much better than Walmart. Firstly, it has much higher working capitals and ratios, and while Walmart’s working capital ratios are all negative, Target has kept its ratios well above 1.0. This shows that it has managed its working capital better. A negative working capital ratio over 4 financial years is just unhealthy in financial terms. c) Target issued debts of 7,446 (in million dollars) between 2010 and 2013, while Walmart issued debts of 30,916. Target paid dividends of -2724 between 2010 and 2013, while Walmart paid dividends of -20985. Target had cash from financing of -11,485 between 2010 and 2013, while Walmart had cash from financing of -43,475. Overall, Target faces lower risk for their long-term funding policy in the most recent year. This is because it has much more cash from its financing activities compared to Walmart. This shows that it has a greater earning power and more liquidity than Walmart. As a result, it is able to implement its long-term funding policy while incurring much lower risks. d) Target issued debts of 7,446 between 2010 and 2013, while Walmart issued debts of 30,916. Based on this evidence, Target had a more prudent investment policy in the most recent financial year. This is because it borrowed less as compared to Walmart. Walmart may be generating more cash flow than Target, but Target has less debt, meaning it is faced with less risk going forward. More often than not, income is not the sole indicator of a business’s good performance. Debt is equally significant. Task 4 Target has adopted a plan of minimizing cash outflows as much as possible, while maintaining a steady cash inflow. On the other hand, Walmart has adopted a plan of ensuring high cash inflows, while maintaining a steady cash outflow. In summary, it is clear that Walmart is focused on growth and expansion despite conditions like debt, while Target leans towards steady expansion and growth that comes with less debt accumulation and risk going forward. Walmart is acutely focused on revenue generation and entering more markets, but Target is able to manage its cash flow better. This is due to the fact that it commands much higher working capitals, and working capital ratios. These are closely related to how it manages its cash flows. Conclusion The difference between net income and net cash flow is as clear as day, but not to everybody. People conversant with business principles and practices may be, but most small business owners are not. They should go out of their way to understand the two concepts because it saves valuable time and money in the end. The teaching of business in learning institutions should be approached from the practical perspective of business owners, rather than the theoretical and sometimes confusing view of scholars. Finally, Target’s financial status is much healthier than Walmart’s. Target’s growth may be slower compared to Walmart’s, but the amount of debt Walmart has makes its growth meaningless. It can generate as much revenue as it wishes, but the debt will scare away future potential investors. Target makes more sense from a holistic business perspective, but Walmart is only commercially attractive, with a bleak long-term outlook. References Elliott, B., & Elliott, J. 2008, Financial accounting and reporting, 12th ed, Harlow: Financial Times Prentice Hall. http://www.bloomberg.com/ Read More