Cash Flow Management For Growth

1. Cash Flow Management For Growth By Ron Bernstein

2. 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 MEET U.S.

3. Sources & Uses of Cash • Investors – Equity • Lenders – Liabilities • Operations • Profit – Income Statement • Working Capital – Balance Sheet • Assets • Property, Plant & Equipment Income Statement and Balance Sheet can be both Sources & Uses of Cash MEET U.S.

4. 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 MEET U.S.

5. 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 MEET U.S.

6. 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 MEET U.S.

7. 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) MEET U.S.

8. What Have We Seen So Far? Profit Is Only One Component of Cash Flow MEET U.S.

9. Profit versus Cash – an Example • 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 Profit and Cash are NOT the same MEET U.S.

10. Cash Is needed to provide Working Capital Profit is calculated before cash is received Monthly operating costs reduce cash Ignored possible cash from lenders or investors Conclusions from Our Example Cash≠ Profit MEET U.S.

11. What Is Working Capital? • Accounts Receivable • Inventory • Accounts Payable • Accrued Expenses Payable Money needed to fund the daily operations of the company MEET U.S.

12. Working Capital Affects Cash • Cash Will INCREASE If: • Collect (reduce) Receivables • Reduce Inventory • Increase Accounts Payable • Increase Accrued Payables MEET U.S.

13. Working Capital Affects Cash • Cash Will DECREASE If: • Increase Receivables • Increase Inventory • Reduce (Pay) Accounts Payable • Reduce (Pay) Accrued Payables MEET U.S.

14. Formula for Working Capital (+) Accounts Receivable (+) Inventory (-) Accounts Payable (-) Accrued Payables = Working Capital Working Capital represents a need for Cash. MEET U.S.

15. Tools for Monitoring Cash Flow • Days Sales Outstanding • Inventory Turnover • Accounts Payable Days Ratios MEET U.S.

16. Days Sales Outstanding • Determine Average Sales/Day • Sales for last 3 months ÷ Number of Days in last 3 months • Divide Receivables Balance by Average Daily Sales Measures the number of days required to collect on a sale MEET U.S.

17. Days Sales Outstanding • Lower is better (generally) • If Invoice Payment Terms are Net 30, Days Sales Outstanding < 45 Days is GOOD MEET U.S.

18. Inventory Turnover • Divide Cost of Goods Sold by Ending Inventory Balance Measures the number of times per year material moves through inventory MEET U.S.

19. Inventory Turnover • Higher is better • Manufacturing Company: • 2 = poor • 4 = average • 6-8 = good MEET U.S.

20. Accounts Payable Days Outstanding • 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 Measures the number of days required to pay a typical vendor invoice MEET U.S.

21. Accounts Payable Days Outstanding • A high figure  Trouble! • If Vendor Terms = Net 30, then Accounts Payable Days should be < 40 Days • If A/P Days > 60 Days, Vendors see a problem and may cut off credit MEET U.S.

22. 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? MEET U.S.

23. Growth and Cash Flow Additional Equipment & Facilities Growth Requires Cash Additional Inventory Additional Receivables MEET U.S.

24. Growth and Cash Flow - Lessons • Growth requires cash • Projections identify cash needs • Ratios help in making projections • Plan ahead! MEET U.S.

25. Strategies & Tactics to Maximize Cash Flow CASH IS KING MEET U.S.

26. Strategies & Tactics to Maximize Cash Flow • Form a Committee from each operational area • Revise department plans if necessary Communicate! MEET U.S.

27. Strategies & Tactics to Maximize Cash Flow • Cancel or delay Purchase Orders for parts not needed • Arrange extended payment terms • Return/sell obsolete parts Purchasing MEET U.S.

28. Strategies & Tactics to Maximize Cash Flow • Delay marketing efforts until ready for production • Focus on selling products that can be shipped (and be paid for!) now Marketing and Sales MEET U.S.

29. 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 MEET U.S.

30. Strategies & Tactics to Maximize Cash Flow • Pay vendors by priority: • 1-Government • 2-Employees • 3-Utilities • 4-Sole Source Vendors • 5-Repeat Vendors • 6-One-time Vendors Vendor payment MEET U.S.

31. 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! MEET U.S.

32. Strategies & Tactics to Maximize Cash Flow • Concentrate on quick shipment projects • Focus on completing new designs • Minimize Engineering Changes – many additional costs Engineering (Research and Development) MEET U.S.

33. Strategies & Tactics to Maximize Cash Flow • Produce products that can be shipped immediately • Minimize “Work In Process” Manufacturing MEET U.S.

34. Summary • Profit ≠ Cash • Monitor and project Cash Flow with ratios • Growth requires cash • Projecting cash needs for growth is important MEET U.S.

35. Conclusion Managing operations to maximize Cash Flow reduces the likelihood of a Cash Crisis MEET U.S.