Optimizing your cash flow during the downturn

1. Optimizing your cash flow during the downturn Alan Miltz Founding Director Inmatrix

2. Objectives • How to conduct a financial health check • How the banks would review your performance • Techniques used by the best global companies to measure financial performance

3. Who am I? 12 years ago I co-founded Inmatrix. We developed Optimist as a standard communication between Accountants, Banks & Companies. A B C

4. 22 Countries +1500 Accountants A B C ‘000s of Companies +200 Banks

5. Gary’s Furniture We are going to use a case study based on a company Gary’s Furniture. • Gary’s Furniture was founded in 2001 • Gary is a furniture importer and manufacturer and distributes to 500 stores including majors and independents • Gary believes he is doing fantastically B-91

6. Gary’s Furniture

7. Gary’s Furniture • On a scale of 1 to 10 how would you rate Gary's Furniture’s financial performance? • On a Scale of 1 to 10 how do you think the Bank rates Gary's Furniture’s financial performance? • What is Gary's cash flow for 2009?

8. The funnel analogy

9. Your company’s strategy • Does your strategy give you a sustainable competitive advantage? (SCA) • Your SCA should be a filtering mechanism when considering new opportunities. ( i.e. Will the new opportunity add value to your SCA?)

10. How does finance measure your SCA? • Profit? • Revenue Growth? • Cash Flow? • Market Share? • Return? • Dividends?

11. How does finance measure your SCA? • Profit • Revenue Growth • Cash Flow • Market Share • Return • Dividends

12. How do your accounts enable you to calculate these measures? • Profit • Revenue Growth • Cash Flow • Market Share • Return • Dividends

13. The accounting equation – the balance sheet

14. The management accounting equation – the balance sheet All funding is moved to the left hand side of the equation

15. The management accounting equation – the balance sheet

16. The balance sheet Operations NOA Funding (E +ND)

17. The balance sheet • Rearrange the accounts of Gary’s Furniture.

18. Gary’s Furniture

19. Gary’s Furniture

20. The management accounting equation – the balance sheet

21. Why go into business? Return On Capital Employed (ROCE) OR Return On Net Assets (RONA) ROCE = RONA (The Dupont Theory of Financial Analysis)

22. Revenue EBIT Revenue Net OperatingAssets X Financial analysis – the theory Return on Capital Employed or Return on Net Assets or ROCE = EBIT/Net Operating Assets OR

23. The ROCE equation • As management it is mission critical that over time we ensure that our EBIT is growing at a faster rate than our investment in our Net Operating Assets.

24. Optimizing Growth 8m 7m 6m 5m 4m 3m 2m 1m • KEY POINTS • Clear understanding of what the business is doing • Which quadrant is the business in now, where is it heading and why? • What are the opportunities for the business? • What will the outcomes be for the business • There are options and the answer is ‘it depends’ • This provides a powerful partnership tool B Optimising growth? C Fast growth? A Declining Growth? D EBIT E Corporate stress? Re-engineering Working Investment? 24m 25m 26m 27m 28m 29m NET ASSETS

25. Business Positioning

26. What return should we be getting? • D + E = NOA • What is the cost of debt = after tax cost of borrowing • What is the cost of equity = Rf + (Beta x Mp) • What is the weighted average cost of capital (WACC)

27. Equity is the most expensive source of funding • Have you ever tried to get equity funding? • Approx 2 to 5% of companies are successful in attaining equity finance • What does an investor look for?

28. Obtaining Equity Finance • A Prospective Investor will look at: • Management • Opportunities • Valuation • Exit Strategy • ROI • Is your Company a MOVER?

29. How do I understand my SCA? • Marketing • Operations • Innovation • HR • Finance • What are the 3 critical success factors for each of the above?

30. Does your business have an SCA?

31. Take my business I founded 11 years ago

32. Plotting your Critical Success Factors

33. Plotting your Critical Success Factors

34. Plotting your Critical Success Factors

35. Techniques to improve your ROCE and Cash Flow • Marketing • Operations • Innovation • HR

36. Marketing – understanding your customers • Most companies operate under the 80/20 rule – • 80% of their customers account for 20% of the revenue.

37. Who do we want to work with? They want a relationship They don’t want a relationship We want a relationship We don’t want a relationship

38. Blind spot? Known by others Unknown by others Known to you Unknown to you

39. What do we do with the 3 and 4s? They want a relationship They don’t want a relationship We want a relationship Increase price Enforce strict terms We don’t want a relationship

40. What do we do with the 1 and 2s? • The goal is to identify your blind spots with your 1 and 2 clients and lock them into your business. • Ask these key clients for a wish list (i.e. what do we need to do to at least be equal with your best supplier?) • Provide these clients with your wish list (i.e. what we want from them) • Document a supply chain agreement.

41. Operations – where are your overheads? They want a relationship They don’t want a relationship We want a relationship We don’t want a relationship

42. Who creates innovation? • Once a week each staff member should provide one idea in writing on how to improve the business. • This is called the 5:15 report.

43. The role of Finance • Finance’s role is to measure your company from a business and banking perspective.

44. The Financial Health Check

45. Strengths Weakness Next Period impact on cash flow Profit Working Capital Fixed Assets Cash FlowFunding The quality of your cash flow

46. For each measure let’s look at…

47. Gary’s numbers

48. The Power of One It is essential to know the cash flow sensitivities of a 1% or 1 day change in: • Price % • Volume % • COGS % • AR • INV/WIP • AP

49. The Power of One Why does an increase in sales volume reduce cash flow?

50. The Power of One - sensitivity