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Firms also need to keep meticulous records of how well they are maintaining their assets and how efficiently and regularly they are producing profitable sales. Asset management, through ratios such as receivables turnover, average collection period, asset turnover ratio, inventory turnover, and average days in inventory, help companies determine how effectively they are turning their tangible assets into sales revenue.
The average collection period is a firm’s indication of how long it takes to receive payment for products sold on account. In other words, it is the average number of days between the date of sale and the date on which the company receives the customer’s payment. Typically, the lower the collection period, the better because it indicates that companies are receiving payment from customers in a timely manner.
The average collection period is calculated by dividing the amount of days per year by the receivables turnover. For 2015, Kellogg’s had a receivables turnover of 9.50, so their average collection period was 365/9.50, or 38 days. In 2016, they had a similar collection period on average because their receivables turnover was about the same at 9.64. In 2017, they had a slightly higher collection period because their receivables turnover had decreased to 9.19. On average, it takes 38 to 40 days for Kellogg’s to receive payment for credit sales (Table 2). General Mills’ receivables collection has been lower than Kellogg’s from 2015-2017 with receivables collection of 33, 32, and 35, respectively.
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When looking at General Mills’ average collection period, it can be concluded that they collect revenue from credit sales faster than Kellogg’s by an average of about six days. This gives General Mills an advantage when collecting receivables and therefore an advantage when gaining sales revenue.
Average days in inventory is, as its name suggests, defined as the amount of time on average, inventory is sitting before being sold. Again, companies should strive for a lower average days in inventory number because the quicker a company can move inventory, the faster it can be sold. Thus, a lower average days in inventory number equates to faster sales and higher sales revenue. The average days in inventory ratio can be calculated by dividing the number of days per year by the inventory turnover ratio for a company.
For Kellogg’s, in 2015, their average days in inventory was 53 days, or 365 days divided by 6.82 or inventory turnover for 2015. In 2016, their average days in inventory was 56 days (365/6.51) and in 2017 their average days in inventory increased to 63 days (365/5.78). Over the past three years, inventory for Kellogg’s has sat without being used for an average of 57 days .
From 2016 to 2017, General Mills has consistently had an average days in inventory number of around 54 days. This indicates that they have also had a consistent inventory turnover ratio throughout those years as well. We can compare the average days in inventory numbers previously stated from Kellogg’s to that of General Mills and can conclude that General Mills has a slight advantage over Kellogg’s at moving inventory by an average of three days over the past three years.
Finally, the last asset management ratio that needs to be considered is the asset turnover ratio. The asset turnover ratio indicates the value of sales revenue in proportion to the value of a company’s assets and represents how efficient a company is at using its assets to generate revenue. This ratio is calculated by dividing revenue by average total inventory. Generally, if a firm has higher asset turnover ratios than its competitors it is an indication that the firm is better utilizing its assets to generate sales.
Using Table 2 as a reference, Kellogg’s asset turnover ratio for 2015 was .93, it decreased slightly in 2016 to .91, and decreased further to .85 in 2017. This decreasing trend indicates that Kellogg’s has used its assets less efficiently over the past three years. General Mills’ asset turnover ratio has been decreasing over the past three years as well. In 2015, their asset turnover ratio was .75. It decreased to .73 in 2016, and decreased further in 2017 .
While both companies’ asset turnover ratios have been consistently decreasing, Kellogg’s had higher ratios in 2015, 2016, and 2017, giving them an advantage over General Mills in terms of efficiently using assets to sell inventory.
Profitability
Profitability is determined by a firm’s capability of yielding financial gain through meeting their goals as efficiently and effectively as possible. It is defined as the excess money the firm retains after covering their expenses and liabilities. The ratios that determine a company’s profitability are profit margin, return on assets (ROA), and return on equity (ROE).
Profit margin is the percentage of a company’s total sales that contribute to their bottom line. It is calculated by dividing net income by net sales. Kellogg’s profit margin in 2015 was 4.54%; it increased to 5.33% in 2016, and increased dramatically in 2017 to 9.82%. This dramatic increase in profit margin was due to an increase in net income from 2016 to 2017 from $694 million to $1.269 billion. General Mills has also increased its profit margin in the last three years. In 2015, their profit margin was 6.93% and increased to 10.25% in 2016. It was 10.61% as of 2017. General Mills’ profit margins are all higher than Kellogg’s over the past three years indicating that they have been more profitable. This is because General Mills has had higher sales numbers over the past three years.
Return on assets indicates a company’s profitability with respect to its total assets. ROA gives a percentage representation of a company’s efficiency at using its assets to produce revenue and is calculated by dividing a company’s net income by its average total assets. Kellogg’s ROA was 8.04% in 2015, it then decreased in 2016 to 4.57%, and finally increased substantially in 2017 to 8.07%. General Mills had a lower ROA than Kellogg’s in 2015 at 5.43%; they then recorded a higher ROA at 7.80% in 2016 than Kellogg’s, and finally they had a lower ROA than Kellogg’s at 7.62% in 2017. Overall, Kellogg’s has higher return on assets percentage which indicates that they have more efficiently used their assets .
Return on equity is the final profitability ratio that companies need to consider. ROE is a percentage indicator of a company’s ability to generate profit with investments provided by shareholders. It is calculated by dividing net income by average stockholders’ equity. Over the past three years, Kellogg’s return on equity has been increasing. In 2015, it was 24.97%. In 2016, Kellogg’s ROE was 34.37%. Finally, in 2017 it rose significantly to 61.57%. General Mills’ ROE has also been increasing over the same years, increasing from 20.35% to 34.20% from 2015 to 2016, and to 35.81% in 2017. As of 2017, Kellogg’s has an advantage in regards to ROE, meaning that they are generating more profits from shareholders’ investments.
Market Value
The market value of a company is defined as the maximum price a consumer would agree to pay based on where the firm stands within the market. The price-to-earnings ratio (P/E) and the market-to-book ratio (M/B) are the two ratios used to determine market value. To calculate the P/E ratio the price per share is divided by earnings per share. The current P/E ratio for Kellogg’s is 13.4 compared to 12 for General Mills. The M/B ratio compares the book value by the market value of a company and is calculated by dividing the market value by the book value. Kellogg’s current M/B ratio is 8.14 compared to 4.13 for General Mills .
Collaborators
Collaborations provide a unique opportunity to promote a product in multiple markets that may or may not overlap. Kellogg’s, with this new product, is in a great position to form new collaborations and strengthen existing relationships. This new product should make Kellogg a very favorable company when it comes to collaborations because not only is this product associated with the Kellogg’s brand, it’s also a new healthy product that we believe will be a safe and profitable option when it comes to collaborations. Before we look into new potential collaborations, we would like to run through some of the current collaborations we currently have in place, from there we can look at areas where we think we could potentially form new collaborations.
When people think of collaborations, they often think of businesses partnering with other brands to sell more product, and while that certainly is an important aspect of collaborations here at Kellogg’s, we also like to focus on how we can collaborate to give back to the communities that gave us the opportunity to sell our products. Kellogg’s was founded in Battle Creek, a city in the state of Michigan, which is why a lot of the nonprofit work Kellogg’s does takes place within the state of Michigan.
One of the first major collaborations comes from the nonprofit Michigan Minority Supplier Development Council (MMSDC) which provides support in the economic growth of minority communities within the state of Michigan. This partnership is critical to Kellogg’s because it gives back to the Michigan minority community by hosting events which give minorities the chance to network with these huge companies to help get people jobs as well as teach them valuable skills to help them within their career. The goal in partnering with nonprofits such as the MMSDC is to “[grow] and [develop] sustainable relationships with diverse businesses” (kelloggcompany.com). While the MMSDC is one of the larger organizations Kellogg’s partners with, many similar organizations that assist in minority communities as well as the LGBT community. We believe that these collaborations are some of the most important because they directly give back to the community in ways other than donations, which we think goes far in showing how grateful Kellogg’s is to the community.
While giving back to the community is important to Kellogg’s, we still put a lot of effort into our business relationships to help promote our product and expand our market presence. One of the major collaborations Kellogg’s was recently a part of came in the form of sponsoring several athletes in the Olympics. The roster is composed of four athletes, an article from AdAge says. “[Kellogg’s] announced four athletes for its marketing team: Nathan Chen, Kelly Clark, Meghan Duggan and Mike Schultz.” (Wohl, 2017) Part of this sponsorship includes placing these athletes on the front of several of Kellogg’s cereal boxes, the goal of these sponsorships is to gain awareness for these athletes as we promote our products. This is one of Kellogg’s larger partnerships but there is one other partnership that we think is beneficial for Kellogg’s going forward.
Throughout the years Kellogg’s has worked with some of the biggest companies in the world, but perhaps none as large as the entertainment giant Disney. The Walt Disney Company is one the world’s largest companies with perhaps the greatest reach. In the past Kellogg’s partnered with Disney in a deal to help put their characters on Kellogg’s products. These characters, according to the New York Times, included Buzz Lightyear from the movie Toy Story, Mickey Mouse and Winnie the Pooh will make their debuts as cereals, and other more Disney characters will eventually appear on Pop-Tarts, Eggo Waffles and Keebler cookies.” (Winter, 2002) This deal came from Disney realizing attendance at its theme parks was dropping. Going forward, we hope to expand on this partnership by including our new product on their list of products they would like to promote. In addition to this, we would like to offer our product for sale at their resorts. Overall, Disney is one of the largest companies in the world, their reach is incredible and by combining our brands we believe we could produce a great amount of promotion and profit for both companies.
While collaborations such as these are very important, one of the most important collaborations comes in the form of deals to move products and to find out who will sell these products. Kellogg’s is invested in a third-party logistics system, working with TDG, to help move and store all of Kellogg’s products. Kellogg’s is also partnered with several major retailers, the giants, in this case, being companies such as Amazon, Target, Meijer, and Kroger. All of the partnerships come together to help promote the Kellogg’s name and, in many cases, keep the company in full operations. The question now is where can Kellogg’s go from here?
While it seems Kellogg has many major collaborations already, there are a couple areas they could move into. Back in the 1990s Kellogg’s was a major sponsor of NASCAR and other motorsport leagues; within these leagues Kellogg’s had its name plastered on the sides and hoods of cars that were racing. This is a partnership that disappeared within the decade. Going forward Kellogg’s could benefit from rekindling that partnership. Though motorsports are not as popular as sports such as football, there is a large potential market that Kellogg’s could benefit from in partnering with these leagues. Overall, Kellogg’s has plenty of room to make some new partnerships that could provide some fantastic benefits moving forward.
