Cash Flow Management

For Growth

ByRon Bernstein

MEET U.S.

Agenda

I.I. Profit and Cash are NOT Profit and Cash are NOT the Samethe Same

II.II. Monitoring Cash Flow Monitoring Cash Flow with Ratioswith Ratios

III.III. Link Between Growth Link Between Growth and Cashand Cash

IV.IV. Operating Tactics for Operating Tactics for Maximizing Cash Flow Maximizing Cash Flow

MEET U.S.

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.

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.

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.

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.

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.

What Have We Seen So Far?

Profit Is Only One Component of Cash Flow

MEET U.S.

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.

CashCash ≠ Profit≠ Profit Cash Is needed to Cash Is needed to provide Working provide Working

CapitalCapital

Cash Is needed to Cash Is needed to provide Working provide Working

CapitalCapital

Profit is calculated Profit is calculated before cash is before cash is

receivedreceived

Profit is calculated Profit is calculated before cash is before cash is

receivedreceived

Monthly operating Monthly operating costs reduce cashcosts reduce cash

Monthly operating Monthly operating costs reduce cashcosts reduce cash

Ignored possible cash Ignored possible cash from lenders or investorsfrom lenders or investors

Ignored possible cash Ignored possible cash from lenders or investorsfrom lenders or investors

Conclusions from Our Example

MEET U.S.

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

What Is Working Capital?

Money needed to fund the daily operations

of the company

MEET U.S.

Working Capital Affects Cash

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

MEET U.S.

Working Capital Affects Cash

• Cash Will DECREASE If:– Increase

Receivables– Increase Inventory– Reduce (Pay)

Accounts Payable– Reduce (Pay)

Accrued Payables

MEET U.S.

Formula for Working Capital

(+) Accounts Receivable

(+) Inventory

(-) Accounts Payable

(-) Accrued Payables

= Working Capital

Working Capital representsa need for Cash.

MEET U.S.

Tools for Monitoring Cash Flow

• Days Sales Outstanding

• Inventory Turnover

• Accounts Payable Days

Ratios

MEET U.S.

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.

Days Sales Outstanding

• Lower is better (generally)• If Invoice Payment Terms are Net

30, Days Sales Outstanding < 45 Days is GOOD

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Inventory Turnover

Divide Cost of Goods Sold by Ending Inventory Balance

Measures the number of times per year material moves through

inventory

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Inventory Turnover

• Higher is better

• Manufacturing Company:

–2 = poor

–4 = average

–6-8 = good

MEET U.S.

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.

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.

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.

Growth and Cash Flow

Growth Requires Growth Requires CashCash

Additional Additional ReceivablReceivabl

eses

AdditionaAdditional l

EquipmenEquipment & t &

FacilitiesFacilitiesAdditionAddition

al al InventorInventor

yy

MEET U.S.

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

MEET U.S.

Strategies & Tactics to Maximize Cash Flow

• Form a Committee from each operational area

• Revise department plans if necessary

Communicate!

MEET U.S.

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.

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.

Strategies & Tactics to Maximize Cash Flow

• 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

Cash collections

MEET U.S.

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.

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.

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.

Strategies & Tactics to Maximize Cash Flow

• Produce products that can be shipped immediately

• Minimize “Work In Process”

Manufacturing

MEET U.S.

Summary

• Profit ≠ Cash

• Monitor and project Cash Flow with ratios

• Growth requires cash

• Projecting cash needs for growth is important

MEET U.S.

Conclusion

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