CASHFLOW Activities And A Firm’s Life Cycle

The top graph shows the pattern of revenues throughout the four stages, which typically follow an interval of development, peaking during maturity, and a following drop as customers change to alternatives. Obviously, the length of the stages and the steepness of the revenue curve differ by type and success of a product.

Products at the mercy of rapid technical change, such as computer and semiconductors software, or driven by fads, such as clothing styles, move through these four phases in just a few years. Other products, such as venerable staple products like Campbell’s soup, Disney movies, Marlboro cigarettes, Gillette razors, Kellogg’s cereal, and Michelin tires can remain in the maturity phase for quite some time. Though it is difficult to identify the precise location of something on its life-cycle curve, you can generally identify the stage and whether the product is in the first or later portion of a stage.

A typical firm provides numerous products, therefore the applicability of the idea and evidence for single products are more difficult when firms are diversified across numerous products at different phases of their life routine. Nevertheless, these patterns are descriptive of firm performance as time passes as they bring in services and discontinue old ones.

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The middle panel of Exhibit 3.1 shows the pattern of online income over the life cycle of a product or company. Net losses usually occur in the introduction and early growth phases because revenues are significantly less than the cost of designing and launching services. The lower panel of Exhibit 3.1 shows the money flows from operating, investing, and funding activities during the four life cycle phases. Much like revenues, the distance of stages and steepness of the net income and cash-flow curves vary depending on the success and sustainability of something or a firm’s procedures and strategy. As products and businesses move through the maturity stage, the cash-flow pattern changes significantly.

Operations become profitable and generate substantial positive cash moves because of market approval of the product and a leveling from working capital needs and asset acquisitions. Also, with revenues leveling off, firms make investments to maintain rather than increase effective capacity. Through the later stages of the maturity phase, net cash flows from sales of unneeded plant assets sometimes lead to a net positive cash flow from investing activities. Firms can use the excess cash flow from functions and, to a lesser extent, from the sale of investments to settle personal debt incurred through the intro and growth phases, to pay dividends, and to repurchase exceptional common stock.

During the decline phase, cash flows from functions and investing activities taper as customers become satiated or switch to alternative products off, decreasing sales thus. At this true point, companies use cash flows to repay outstanding debt from the introduction and growth phases and pays dividends or repurchase common stock from equity investors. Few business firms rely on a single product; most have a variety of products at different levels of the full life cycle.

A multiproduct firm such as PepsiCo may use cash generated from products in the maturity stage of their life cycle to fund products in the introduction and growth phases and therefore not want as much external financing. Furthermore, the declaration of cash flows discussed in this chapter reports quantities for a company all together and not for every product. If the life-cycle idea is to assist in interpreting claims of cash flows, you should appreciate how individual products aggregate at the firm level. Understanding of competitive industry trends and dynamics can help guide you through an assessment of firm-level cash moves.

For example, investor excitement in technology-driven industries such as biotechnology most often peaks through the growth phase. Although such firms may have some products at various stages of the product life cycle, the interest is within forecasting the emergence of new technologies that result in new products that may generate large profits and cash flows.