barrow boy's guide to cashflow

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Barrow Boy’s Guide

to Cashflow

Business Finance Training


Barrow Boy’s Guide

to Cashflow


Bazzer’s



The recession has pushed many businesses in to bankruptcy, including some famous high street names.

But come boom or bust, businesses like Bazzer’s fruit and veg stall always do well.

How do they do it?


Barrow Boy’s Guide to Cashflow

• Bazzer’s business secrets

– Bazzer has a clear business objective and strategy

– He knows what his customers want

– Bazzer is master of the essential business finance skills

– And managing cashflow is his number one priority

It’s far too important to leave to my accountant



• Cashflow is the ‘lifeblood’ of the business

• But how do you get strong cashflow?

– Ready access to additional funds

– Effective working capital management

– Strong business profits

Lose control of cashflow and you’ve lost control of your business



LoansOwners funds Cas

h

What is working capital? External Internal

Funds come in to the business as cash - from the business owner, from share capital and loans




h


Stock Cash is converted in to stock




h


Stock

DebtorsWhen stock is sold and invoiced it is converted in to what accountants call debtors. But it is better to think of it as a ‘free loan’ to the customer



LoansOwners funds

Stock

Cash

Debtors

= Trade Cycle


When customers pay their invoices debtors are converted back to cashThis is called the Trade Cycle



LoansOwners funds

Stock

Cash

Debtors

Creditors

External Internal

What is working capital?

If suppliers give credit terms this is effectively a free loan to the business - and an additional source of funds, referred to as creditors



LoansOwners funds

Stock

Cash

Debtors

Creditors

External Internal


When the supplier invoice is paid the funds flow back to the creditor.



LoansOwners funds

Stock

Cash

Debtors

Creditors= Working capital

External Internal


Working capital is the circulating capital inside your business

Cash, stock, debtors and creditors together make up working capital



• Managing working capital: Frank’s FashionsAnnual sales £4,800,000

Cost of sales £3,600,000

How much working capital does a business need?Let’s have a look Frank’s Fashions – my mate’s business that imports women’s clothes and sells them wholesale





Stock (inventory) £ 600,000Working capital:

Frank normally holds enough stock to cover two months’ sales – this means he can offer a good choice and supply quickly

The average cost of two months’ sales is 2 x £3,600,000 = £600,000 12





Stock £ 600,000Working capital:

It usually takes 40 days for Frank’s customers to settle their invoices – that’s not bad for the wholesale trade

The value of 40 days uncollected sales is 40 x £4,800,000 = £530,000 365

Debtors £ 530,000





Stock £ 600,000Working capital:

Most of Frank’s suppliers give him one month’s credit

The value of 30 days credit on stock purchases is 1 x £3,600,000 = £300,000 12

Debtors £ 530,000Creditors £( 300,000)





Stock

£ 830,000

£ 600,000

£( 300,000)

Working capital:

Debtors Creditors

£ 530,000

Which means Frank needs £830,000 to fund his working capital

WORKING CAPITAL



Stock

Cash

Debtors

Creditors= Working capital

External Internal

The working capital cycle

Now let’s work out how long it takes to complete this circulating process which the accountants call the ‘working capital cycle’





Stock

£ 830,000

£ 600,000

£( 300,000)

Working capital:

Debtors Creditors

WORKING CAPITAL

= 60 days to sell the stock£ 530,000 = 40 days to collect the ‘free loans’

= (30) days to pay suppliers

= 70 days working capital cycle

Frank’s business takes 70 days to complete the working capital cycle



It’s important that when you make any business decisions you take in to account the likely impact on working capital and cashflow – lot’s of businesses don’t.

Frank decided he could save a few quid by importing some of his women’s clothes from China.

He got the cost of the clothes down a bit but the problem was it took longer to get here. Frank had to increase the amount of stock he held to cover the longer delivery time.

In fact he had to hold an extra one months’ worth of stock - and he hadn’t checked how much this was going to cost him!





Stock

£ 830,000

£ 600,000

£( 300,000)

Working capital:

Debtors Creditors WORKING CAPITAL

£ 530,000

The extra delivery time means Frank must increase his stock by 50%

= 60 days to sell the stock





Stock

£ 1,130,000

£ 900,000

£( 300,000)

Working capital:


£ 530,000

So Frank has to find an extra £300k to fund the additional stock!

+ £300,000

+ £300,000





Stock

£ 1,130,000

£ 900,000

£( 300,000)

Working capital:


£ 530,000= 90 days to sell the stock= 40 days to collect the ‘free loans’= (30) days to pay suppliers

= 100 days working capital cycle

The business takes 30 days longer to complete the working capital cycle



Frank didn’t have all of the £300,000 he needed for the extra stock so he borrowed some from his brother.

If he hadn’t been able to get hold of the £300,000 he would have been in trouble one way and another.

Frank was lucky, lots of other businesses get caught out by ignoring working capital.

Some pay the ultimate price and go bust!



• Bazzer’s pukka cashflow rules

– So remember - cashflow is the lifeblood of your business

– And good working capital control is key to strong cashflow

• Because working capital uses business funds

• Keep stocks and debtors at optimum level

• Good credit management and collection is vital

• Complete the trade cycle as quickly as possible

Think cashflow! How do decisions affect working capital and cashflow?


Look out for my Barrow Boy’s

Guideto Profit



Business Finance Training the cost effective way to improve business results

Paul Lower FCMA