Cash Flow Management

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• Cash Flow Management
• For Growth

By Ron Bernstein
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Agenda

• Profit and Cash are NOT the Same
• II. Monitoring Cash Flow with Ratios
• III. Link Between Growth and Cash
• IV. Operating Tactics for Maximizing Cash Flow

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Sources Uses of Cash
Income Statement and Balance Sheet can be
both Sources Uses of Cash

• Investors Equity
• Lenders Liabilities
• Operations
• Profit Income Statement
• Working Capital Balance Sheet
• Assets
• Property, Plant Equipment

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Typical Cash Flow Young Company

• Sources of Cash
• Investors Equity
• Lenders Liabilities
• Uses of Cash
• Investment Purchase Equipment Facilities -
  Assets
• Operations
• Losses Income Statement
• Working Capital Purchase Material Increase
  Receivables Assets

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Typical Cash Flow Growth Company

• Sources of Cash
• Operations Profit
• Lenders Additional Debt
• Investors Additional Equity
• Uses of Cash
• Investment in Fixed Assets
• Operations Working Capital

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Typical Cash Flow Mature Company

• Sources of Cash
• Operations - Profit
• Uses of Cash
• Investors Dividends
• Lenders Repay Debt
• Minimal Cash Flow In/Out
• Investment/Sale of Fixed Assets
• Operations Working Capital

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Typical Cash Flow Company in Trouble

• Sources of Cash
• Sale of Fixed Assets
• Lenders (maximize borrowing)
• Investors (as much as investors are willing or
  able to invest)
• Uses of Cash
• Operations Losses
• Operations Increased Working Capital (Out of
  Control)

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What Have We Seen So Far?

• Profit Is Only One Component of Cash Flow

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Profit versus Cash an Example
Profit and Cash are NOT the same

• Cash paid when product is produced 1-3 months
  before shipment (sale)
• Cash received 1-2 months after product shipped
• Profit (Revenue Expense) recorded at time of
  shipment

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Conclusions from Our Example
Cash ? Profit
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What Is Working Capital?
Money needed to fund the daily operations of
the company

• Accounts Receivable
• Inventory
• Accounts Payable
• Accrued Expenses Payable

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Working Capital Affects Cash

• Cash Will INCREASE If
• Collect (reduce) Receivables
• Reduce Inventory
• Increase Accounts Payable
• Increase Accrued Payables

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Working Capital Affects Cash

• Cash Will DECREASE If
• Increase Receivables
• Increase Inventory
• Reduce (Pay) Accounts Payable
• Reduce (Pay) Accrued Payables

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Formula for Working Capital
Working Capital represents a need for Cash.

• () Accounts Receivable
• () Inventory
• (-) Accounts Payable
• (-) Accrued Payables
• Working Capital

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Tools for Monitoring Cash Flow
Ratios

• Days Sales Outstanding
• Inventory Turnover
• Accounts Payable Days

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Days Sales Outstanding
Measures the number of days required to collect
on a sale

• Determine Average Sales/Day
• Sales for last 3 months Number of Days in last
  3 months
• Divide Receivables Balance by Average Daily Sales

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Days Sales Outstanding

• Lower is better (generally)
• If Invoice Payment Terms are Net 30, Days Sales
  Outstanding lt 45 Days is GOOD

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Inventory Turnover
Measures the number of times per year material
moves through inventory

• Divide Cost of Goods Sold by Ending Inventory
  Balance

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Inventory Turnover

• Higher is better
• Manufacturing Company
• 2 poor
• 4 average
• 6-8 good

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Accounts Payable Days Outstanding
Measures the number of days required to pay a
typical vendor invoice

• Determine Average Purchases/Day
• Cost of Goods Sold for last 3 months Number of
  Days in last 3 months
• Divide Accounts Payable Balance by Average Daily
  Purchases

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Accounts Payable Days Outstanding

• A high figure ? Trouble!
• If Vendor Terms Net 30, then Accounts Payable
  Days should be lt 40 Days
• If A/P Days gt 60 Days, Vendors see a problem and
  may cut off credit

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Ratio Analysis

• Analyze the ratios
• Are the values excellent, average or poor?
• Analyze the trend
• Look at a series of calculations of the same
  ratio at different periods of time
• Is the trend getting better or worse?

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Growth and Cash Flow
Additional Equipment Facilities
Growth Requires Cash
Additional Inventory
Additional Receivables
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Growth and Cash Flow - Lessons

• Growth requires cash
• Projections identify cash needs
• Ratios help in making projections
• Plan ahead!

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Strategies Tactics to Maximize Cash Flow

• CASH IS KING

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Strategies Tactics to Maximize Cash Flow
Communicate!

• Form a Committee from each operational area
• Revise department plans if necessary

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Strategies Tactics to Maximize Cash Flow
Purchasing

• Cancel or delay Purchase Orders for parts not
  needed
• Arrange extended payment terms
• Return/sell obsolete parts

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Strategies Tactics to Maximize Cash Flow
Marketing and Sales

• Delay marketing efforts until ready for
  production
• Focus on selling products that can be shipped
  (and be paid for!) now

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Strategies Tactics to Maximize Cash Flow
Cash collections

• Call customers when their receivable is 35 days
  old
• Immediately resolve any issues that customers
  have
• Hold shipments to customers who are late paying
  previous invoices

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Strategies Tactics to Maximize Cash Flow
Vendor payment

• Pay vendors by priority
• 1-Government
• 2-Employees
• 3-Utilities
• 4-Sole Source Vendors
• 5-Repeat Vendors
• 6-One-time Vendors

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Strategies Tactics to Maximize Cash Flow

• Project dates to pay for each invoice
• Communicate that date when asked
• Pay the invoice on the promised date!

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Strategies Tactics to Maximize Cash Flow
Engineering (Research and Development)

• Concentrate on quick shipment projects
• Focus on completing new designs
• Minimize Engineering Changes many additional
  costs

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Strategies Tactics to Maximize Cash Flow
Manufacturing

• Produce products that can be shipped immediately
• Minimize Work In Process

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Summary

• Profit ? Cash
• Monitor and project Cash Flow with ratios
• Growth requires cash
• Projecting cash needs for growth is important

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Conclusion

• Managing operations to maximize Cash Flow reduces
  the likelihood of a Cash Crisis