The net cash flows from operating activities for Coca Cola and Amazon are as follows:
It is evident from the above exhibit that Coca Cola Company has higher net cash flows from the operating activities, as compared to that of Amazon.com. The difference between the two’s net cash flows can be attributed to a number of factors. These factors are:
1. Scope and Nature of Business Activity
Scope of business activity refers to the stretch of business at a number of dimensions. The range of dimensions includes target audience, range of products, frequency of product usability. Among all these dimensions, if we compare Coca Cola and Amazon, Coca Cola is far ahead of Amazon.com. The target audience for books (the major item sold at Amazon.com) is just the students and teachers, whereas, the audience for coke ranges from people of age of 7 years to 50 years, regardless of their educational level. Thus, higher the audience scope, the more the sales, leading to greater cash flows. Moreover, the cycle of use for books is longer than that of coke, leading to lesser sales volume.
2. Company’s Growth Stage
Another important factor in the determination of net cash flow from operating activities is that of the stage of maturity of the company. When a company is in its initial days, the sales are lower while the expenses are higher that would yield in future, thus at that point of time, negative net cash flow from operating activities is something very normal. Moreover, especially for the high tech companies, the initial investment is quite higher as compared to initial sales. This also leads to negative cash flows.
3. Operational Efficiencies
Operational efficiencies refer to how efficient business operations are carried out and how well the cash flows are managed. At times the sales are equal but the cash management policies are the ones that result in delays in cash generation or greater expenditures on cash before generating that much cash.
However, out of these three reasons, the one that best describes the difference in cash flows is the first one that is the scope and nature of the business differs for the two. Consequently, it can also be concluded that the companies may generate negative cash flows in its initial days, or due to operational of cash management inefficiencies and the one that has been started with high capital investment may also have negative operational cash flows in its initial days. On the contrary, those companies would have larger cash flows that are quite stable, having efficient operations and cash management and have broader scope of business with greater units sold, in most of the cases. There may, however, be exceptions to these principles. The largest investing activities for Coca Cola in terms of inflows is the proceeds from the disposal of bottling companies and other investments. The same for Amazon is sales and maturities of marketable securities and other investments. In terms of outflows, the major investing activities for Coca Cola is purchase of plant, property and equipment. The same for Amazon is purchase of marketable securities and investments.
Brigham, E. F., & Houston, J. F. (2008). Fundamentals of Financial Management. Mason, OH: South-Western College Pub.