From the course: Financial Modeling and Forecasting Financial Statements
The Home Depot story revisited
From the course: Financial Modeling and Forecasting Financial Statements
The Home Depot story revisited
- Back in 1985 Home Depot had cash flow problems that had pushed the company to the wall. - In fact, with a cash burn rate of $3 million dollars per week and with just 9 million dollars cash in the bank Home Depot had just three weeks to figure out how to either get some additional external financing or reduce dramatically this cash burn rate. - So, what did they do? - Well, a combination of factors, really. But most of what they did was focused on improving their operating cash flow. - First and foremost, they launched an inventory management system that allowed them to track their inventory more carefully. With more careful inventory management they didn't need as much inventory lying around idle in the middle of their warehouse stores. - Less inventory lying around means fewer inventory purchases. And that means less cash flowing out to suppliers to pay for inventory that's just going to be sitting around on shelves. - Now in 1985, Home Depot spent $69 million dollars to buy extra inventory. That contributed to their 1985 cash flow problems. - In 1986, while still growing pretty rapidly, the company was able to keep that inventory increase down to just $14 million dollars. Saving their cash for other things. - Now, in 1986, Home Depot was also proactive in collecting its outstanding receivables. - Receivables are a potential source of cash, and Home Depot certainly needed cash. - Home Depot reduced its overhead expenses, increased its profit margins, gently stretched out the time it took to pay its suppliers. All of these things improved the companies operating cash flow and reduced the cash burn rate. - Home Depot conducted an old fashioned, roll up the sleeves, back to basics, re-struction of its operations, and it worked. - In fact, with these operating cash flow improvements, along with some snazzy sales lease back transactions. That's a story for another day. Home Depot was able to completely turn around its cash flow position. - From a cash burn rate of $3 million dollars per week in 1985. Home Depot switched over to a cash generation rate of almost $1 million dollars per week the next year. An amazing turn around. - It was this cash flow turn around that saved Home Depot and launched the company on its path to become the number 23 company in the Fourtune 500 listing in 2018. - And how about the companies cash burn generation rate now? - Well, in 2018, Home Depot generated average surplus cash from operations over and above the cash needed for capital expenditures of $204 million dollars, a week. - A week. Home Depot's amazing cash flow turn around in 1986 didn't happen by itself, and it wasn't mysterious. - The impact of each of the many actions Home Depot took in 1986 can be understood and forecasted through careful financial statement modeling. - After a little bit more preparation, we will be ready to look at a cash flow projection spreadsheet that illuminates exactly what Home Depot did to save itself in 1986.
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