operations (and the ensuing earnings) to lower-tax
locales. Risk management can also play a role in
reducing taxes by smoothing out earnings over
periods;spikesinincomecansubjectafirmtohigher
taxes.- Reduce capital maintenance and working capital
investments. A significant portion of after-tax
operatingincomeisoftenreinvestedinthefirmnotto
generate future growth but to maintain existing
operations. This reinvestment includes capital
maintenance(whichis capitalexpendituredesigned
to maintain and replace existing assets) and
investments in inventory or accounts receivable.
Much of this reinvestment may be unavoidable,
becauseassetsageandfirmsneedworkingcapitalto
generatesales.Insomefirms,though,theremaybe
potentialforsavings,especiallyinworkingcapital.A
retailfirmthatmaintainsinventoryat 10 percentof
saleswhentheaverageforthesectorisonly 5 percent
canincreasecashflowssubstantiallyifitcanbringits
inventory levels down to industry standards.
Increase Expected Growth
Afirmwithlowcurrentcashflowscanstillhavehighvalueif
itisabletogrowquicklyduringthehigh-growthperiod.As
noted earlier, higher growth can come either from new
investments or from more efficiently utilizing existing assets.
- With newinvestments, highergrowth has to come
fromeitherahigherreinvestmentrate,ahigherreturn
on capital on new investments, or both. Higher
growthdoesnot alwaystranslateintohighervalue,