Describe How Value-Added Is Calculated. to What Extent Are Value Added, Cash Flow, and Profit Connected to a Company’s Sales Performance?

Topics: Generally Accepted Accounting Principles, Revenue, Income statement Pages: 6 (1835 words) Published: December 30, 2011
Describe how value-added is calculated. To what extent are value added, cash flow, and profit connected to a company’s sales performance?

Throughout this essay I will be exploring how value added is calculated and to what extent value added, cash flow and profit are connected to a company’s sales performance. I will do this by introducing value added and the formulas in which they are calculated, mathematically and through accounting, the purpose why value added is calculated and the theory of Cox. Moreover, I will explain how value added is related to a company’s sales performance using an extended example. Nonetheless, cash flow is a measurement of a company’s money generated in the company in order to pay for expenses, and how this rapports to sales performance. I will then further explain how profit is related to sales.

Cox Bernard concluded that value added was the profound ‘way to get at meaningful figures of output would be to take the value of production in the economy minus the cost of bought-in materials and services’ (Cox, 1979), it is used ‘to measure the income’ (Cox, 1979). The excess remainder is distributed to labour costs, social costs, depreciation and operating profits which all add up to true value added. Value added is calculated to sustain employment, and to measure a company’s growth; the money left is fundamental in order to pay the suppliers and the workforce that sustains employment.

To measure productivity, which is derived from sales performance value added per employee is used, it shows that the higher the rates the higher the productivity, which highlights output and efficiency. By implementing the value added to sales ratio, this allows one to view physical productivity whether it is genuinely achieved or through the reduction of employees and reducing expenses; value added divided by sales.

Moreover, financial factors strongly link to sales performance because they are the outcomes of the ‘physical production’ (Sukhdev, 2011). By using value added we explore and understand the characteristics of the firm better, labour share and cash flow of value added are considered. Labour share is crucial as it indicates if there is a high labour share, if there is, the firm is prone to negative market conditions and economical changes. However, cash flow as a percentage of value added highlights how ‘cash-generative’ (Sukhdev, 2011) an organisation is, and how sufficient the inflow is for ‘the claims of investment and profit distribution’ (Sukhdev, 2011).

‘Cash flows are inflows and outflows of cash and cash equivalents’ (Van Greuning,2005) which are fundamental factors in regards to the company’s sales performance. This is because cash flow is money generated through sales into the company in order to pay for overheads and liabilities, which is why it’s not profit. This source of money is only money that flows in and out of the company. There are three aspects of cash flow, cash flow from operations, from investing and cash flow from financing which account to the company’s sales performance.

Cash from operations or ‘Operating activities are principal revenue-producing activities and other activities that do not include investing or financing activities’ (Van Greuning, 2005), it is the firm’s formidable source of cash generated in contrast to external funds from investing activities. The equation for operating cash flow is operating cash flow = Earnings Before Interest And Taxes + Depreciation – Taxes. Operating profit underlines the measurement of cash an organisation is producing because it includes non-cash adjustments such as depreciation and amortization to net income and it involves the alteration in working capital which nonetheless also supply’s cash. These aspects are fundamental in concluding the amount a business is generating, therefore we recognise that ‘operating cash flow correlates with net income’ (Van Greuning, 2005) greatly as it permits one to distinguish...
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