CASH – THE KING OF FINANCE

Presentation tocpa moms™

Doug SmithB2B CFO®

December 20, 2011

What Is B2B CFO® ?

Established: Founded in 1987

National : 211 Partners in 39 states, 6,000 years of experience

Focused: Privately-held companies with sales between $1 - $70M

Affordable: Part-time CFO services

Who Am I?

• 33 Years in Operations, Finance, Administration• COO, CFO, CAO• Government Contracting, IT, Healthcare• M&A experience (seller, buyer)• BS Engineering, MBA

CASH – THE KINGOF FINANCE

The CFO’s Main Rule

•CASH IS KING

– For most small businesses, cash is most of the rest of the royal family also

What Financial Reports Say About the Business

• Income Statement (P&L)– It’s a look at past history, not the present or future– Positive income ≠ More cash

• Balance Sheet– It’s a snapshot– Doesn’t show money to be received from invoices

sent out but not paid– Doesn’t show the money needed for next week’s

payroll

What Financial Reports Say About the Business (cont’d)

• Some non-cash expenses show up in the P&L– Depreciation– Amortization

• Some cash expenses don’t show up in the P&L– Outlays to purchase capital equipment– Loan principal repayments– Owner distributions

  Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total

Revenue $5,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $115,000

Expenses $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $90,000

Profit ($2,500) $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $25,000

Cash Income Received $5,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $95,000

Cash Balance ($7,500) ($15,000) ($17,500) ($15,000) ($12,500) ($10,000) ($7,500) ($5,000) ($2,500) $0 $2,500 $5,000

Cash – It’s All About the Timing

  Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total

Revenue $5,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $115,000

Expenses $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $90,000

Profit ($2,500) $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $25,000

Initial Equity $20,000

Cash Income Received $5,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $95,000

Cash Balance $12,500 $5,000 $2,500 $5,000 $7,500 $10,000 $12,500 $15,000 $17,500 $20,000 $22,500 $25,000

Cash Balance minus Equity ($7,500) ($15,000) ($17,500) ($15,000) ($12,500) ($10,000) ($7,500) ($5,000) ($2,500) $0 $2,500 $5,000

Cash – It’s All About the Timing (cont’d)

  Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total

Revenue $10,000 $11,000 $12,000 $13,000 $14,000 $15,000 $16,000 $17,000 $18,000 $19,000 $20,000 $21,000 $186,000

Expenses $8,500 $9,000 $9,500 $10,000 $10,500 $11,000 $11,500 $12,000 $12,500 $13,000 $13,500 $14,000 $135,000

Profit $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 $5,000 $5,500 $6,000 $6,500 $7,000 $51,000

Initial Equity $20,000

Cash Income Received $10,000 $11,000 $12,000 $13,000 $14,000 $15,000 $16,000 $17,000 $18,000 $19,000 $145,000

Cash Balance $11,500 ($9,000) $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 $5,000

Cash Balance minus Equity ($8,500) ($29,000) ($19,500) ($19,000) ($18,500) ($18,000) ($17,500) ($17,000) ($16,500) ($16,000) ($15,500) ($15,000)

Cash – It’s All About the Timing (cont’d)

QuickBooks and Cash Flow

• Mapping between Profit and Loss, Balance Sheet, and Statement of Cash Flows

Forecasting Cash Flow

• At a minimum, forecast next 3 months• Forecast each week in the month• For small expense categories, use 3-6 month rolling historical

average• Show large cash needs (e.g., payroll, rent) in the week they

occur• Don’t forget other extraordinary cash needs (e.g., owner

distributions for quarterly tax payments)• Be reasonable and conservative in forecasting income

(probability of collecting > 90%)• Learn over time

– Keep past forecasts, compare to what actually happened– Adjust forecasting methodology based on lessons learned

Cash Forecast Example

  Week (future)

  1 2 3 4 5 6 7 8 9 10 11 12 13

Beginning Balance $100,000 $95,000 $120,000 $109,000 $134,000 $129,000 $154,000 $149,000 $148,000 $143,000 $168,000 $163,000 $182,000

  Cash Income Received $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 $40,000

 

Payroll (bi-weekly) $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000

Rent (monthly) $6,000 $6,000 $6,000

Quarterly Tax Payment $20,000

Other Non-Labor Cash Expenses $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000

Total Cash Expense$45,000 $15,000 $51,000 $15,000 $45,000 $15,000 $45,000 $41,000 $45,000 $15,000 $45,000 $21,000 $45,000

 

Net Cash ($5,000) $25,000 ($11,000) $25,000 ($5,000) $25,000 ($5,000) ($1,000) ($5,000) $25,000 ($5,000) $19,000 ($5,000)

 

Ending Balance $95,000 $120,000 $109,000 $134,000 $129,000 $154,000 $149,000 $148,000 $143,000 $168,000 $163,000 $182,000 $177,000

Getting Information on Cash

• From the Bank?– Not a good idea to rely on bank balance

• (Although many owners do)– Bank account doesn’t show:

• Checks written, but not yet presented to bank for payment• Payments received by the business, but not yet deposited

• From the Accounting System?– Good source, AS LONG AS system has been used

completely, and kept up to date– Reconcile monthly bank statements against what’s in

accounting system as part of month-end close

Improving Your Cash Position

• Retained earnings – keep cash in the business• Shorten A/R days

– Close the books as soon as possible after the month ends

– Send invoices by e-mail rather than snail mail– Ensure invoices are clear and complete

• Write the expected due date on the invoice– Get paid electronically– Use a lockbox at the bank to receive cash payments– Actively work the A/R list, following up on invoices

outstanding more than 30 days

Improving the Cash Position (cont’d)

• Reduce inventory carrying costs– Use “just in time” supply chain procedures – only

receive parts just before needed for production• Accounts payable

– Only pay in accordance with contractual payment terms

– For Net 30 terms, pay on day 30, not before• Reduce Bad Debt

– Have customers fill out a credit application– Check customer reference, Dun & Bradstreet info, etc.

Improving the Cash Position (cont’d)

• Partner with a collection agency– Use them to collect older, uncollected invoices– There’s a cost, but it’s better than not receiving

payment at all– Use a Factor

• Use only if you’re in a cash crisis• Factors lend cash through a process where you sell them

your A/R– They advance you a portion (70-85%) of the A/R balance

• When payment received, you receive the balance of the money not advanced, minus their discount fee

– Imputed interest rate much higher than a bank loan (30-40% APR)

Special Considerations for S Corporations

• Many S Corporations file their taxes on a cash accounting basis (even if books are maintained on accrual basis)

• To minimize taxes:– Prepay some expenses (e.g., rent)– Stretch some receivables into the next tax year– BUT, you can only do these if you have enough

available cash

Best Practice Example:Dell Computer

• Cash conversion time: time between when a sale is made and the cash is received– Dell’s is MINUS 15 days

• Dell gets your money as soon as you order• Dell’s supply chain process

– Parts are delivered to Dell factory, but placed in a special holding area• Still considered the property of the supplier• Can sit there for a week or more

– Parts move into Dell’s inventory only when moved to the computer assembly bench

– The computer is built that day, and mailed to the customer within 2-3 days

Questions? Comments?

Doug SmithPartner, B2B CFO®

e-mail: dougsmith@b2bcfo.comphone: 703.927.9823website: www.dougsmithcfo.com