how can i make a profit and still run out of cash? review financial statements cash flow and working...

How can I make a profit and still run out of cash?

Review Financial StatementsCash Flow and Working Capital

Foundations Update

…and the market continues to be competitive More products More aggressive More options

Round 0

Round 1

Round 2

The story thus far…

Key points of strategy: Product characteristics

Positioning matching ideal spot - critical in High Tech segment

Margin pricing not high enough costs not low enough

automation too low low tech positioning too aggressive MTBF too high

The story thus far… Sales forecasts

possibly not accounting for lag in product introduction may need to plan for full-scale product demand in 2 years – not 1

Liquidation older products?

Products developing new products v. repositioning current products a

viable strategy? What are the trade-offs? Cash management

running out of cash & making a profit?

Business Activities

Your Cash Management decisions:1. Operating: using $

create goods /services/ exchanges

2. Investing: what do you do with $ acquire assets (stuff) to run a businessrenting $ to others (who earn higher return)

3. Financing: where do you get $funds to start and grow a business (debt / equity / retained earnings)

Operating

Run the company that you have… with Working Capital

Production

cash & accts payable ==> inventory

Sellinginventory ==> cash & accts receivable

Where is the Working Capital?

On the Balance Sheet, Working Capital shows up as: Current Assets Current Liabilities

operatingworking capital


Balance SheetASSETS 2008

Cash $0Accounts Receivable $5,916

Inventory $8,120Total Current Assets $14,306

Plant & Equipment $48,800Accumulated Depreciation ($11,181)Total Fixed Assets $37,619Total Assets $51,655

LIABILITIES & OWNER'S EQUITY

Accounts Payable $4,926Current Debt $11,273Long Term Debt $15,833Total Liabilities $32,032

Common Stock $4,313Retained Earnings $15,310Total Equity $19,623

$51,655Total Liabilities & Equity

4,8984,940

0$ 9,838

$28,200($7,928)$20,272$30,110

$3,901$ 867

$10,333$15,101

$2,313$12,679$15,010

$30,110

2007

Inventory Too little inventory

sell all the sensors you make ==> STOCK OUT lost sales & opportunities ==> bad management

Too much inventory inventory is expensive- it ties up cash product “ages” and is less desirable

Just right 1 or more units left less than 60 days (production scheduled/6)


Cash has been depleted from last year. Where is it? It was eaten up by inventory – a result of poor sales

forecasting Carrying costs

Accounts payable increased Partially offsets high inventory levels

(it is like an interest free loan from vendors)


Current Debt has increased by $10,406 If sales are increasing and need to fund inventory and

accounts receivables (current assets), this may be justified.

It is not a good idea to fund long term assets (plant and equipment) with short term debt, because it could take years for this investment to pay off.

Working Capital and Cash Flow Business Cycle

If you turn a lot of cash into inventory

but less inventory back into cash (a lot of inventory left over)

you run out of cash (its in the warehouse waiting to be changed back)

Accounts Payable

Inventory

Sales

Accounts Receivable

Cash

Less

Business Activities

Your Cash Management decisions:1. Operating: using $ Operating: using $

create goods /services/ exchangescreate goods /services/ exchanges

2. Investing: what do you do with $ acquire assets (stuff) to run a businessrenting $ to others (who earn higher return)

3. Financing:Financing: where do you get $where do you get $funds to start and grow a business (debt / funds to start and grow a business (debt / equity / retained earnings)equity / retained earnings)

Investing

Create company you want to run? Build a new factory? Increase capacity for a current product? Increase Automation?

All will increase Plant & Equipment, so it follows that… Any increase in the value of plant and equipment is an

increase in capacity or an investment in your company

Capacity

If you increase your capacity, it is a long-term

investment long term or fixed asset and you

should generate the funds from – long term sources:

retained earnings issue bonds issue stock

investing











4,8984,940

0$ 9,838

$28,200($7,928)$20,272$30,110

$3,901$ 867

$10,333$15,101

$2,313$12,679$15,010

$30,110

2007

Business Activities

Your Cash Management decisions:1. Operating: using $ Operating: using $

create goods /services/ exchangescreate goods /services/ exchanges

2. Investing:Investing: what do you do with $what do you do with $ acquire assets (stuff) to run a businessacquire assets (stuff) to run a businessrenting $ to others (who earn higher return)renting $ to others (who earn higher return)

3. Financing: where do you get $funds to start and grow a business (debt / equity / retained earnings)

Financing

Funds to grow & operate Borrow- issue bonds Take on owners- Issue stock Reinvest profits- increase retained earnings

Extra cash (no investments to make) retire bonds (lower interest payments) retire stock (only if stock price is low) pay dividend - (increase stock price)

Give the money back to rightful owners if you don’t have anything better to do with it

Financing…

Put your worst case scenario in Marketing’s Unit Sales Forecast

Finance long term investments with long term options (stock or bonds)

Cover operating expenses with short term loans Ending cash position target

3.5% and 7% of total assets

financing

investing











4,8984,940

0$ 9,838

$28,200($7,928)$20,272$30,110

$3,901$ 867

$10,333$15,101

$2,313$12,679$15,010

$30,110

2007









4,8984,940

0$ 9,838

$28,200($7,928)$20,272$30,110

$3,901$ 867

$10,333$15,101

$2,313$12,679$15,010

$30,110

2007

What changed as a result of the year’s operations?









4,8984,940

0$ 9,838

$28,200($7,928)$20,272$30,110

$3,901$ 867

$10,333$15,101

$2,313$12,679$15,010

$30,110

2007

change as a result of the year’s decisions

($4,898)($ 976)

($ 8,120)

($20,600) 3,253

$1,025$10,406$ 5,500

$2,000$2,631

change









4,8984,940

0$ 9,838

$28,200($7,928)$20,272$30,110

$3,901$ 867

$10,333$15,101

$2,313$12,679$15,010

$30,110

2007 change decisions

($4,898)($ 976)

($ 8,120)

($20,600) 3,253

$1,025$10,406$ 5,500

$2,000$2,631

ran out $

Unsold sensors

big invest.

e-loan

long termfinancing

profitre-invested

Cash Flow Statement

Shows movement of cash in and out of an organization over a given period

Shows how much cash is available for use during a given period

Reconciles net profit back to cash operating activities investing activities financing activities

Cash Flows from Operating ActivitiesNet Income (Loss) $2,631Adjustment for non-cash items

Depreciation $3,253

Change in Current Assets and LiabilitiesAccounts Payable $1,025Inventory ($8,120)Accounts Receivable ($976)

Net cash from operations

Cash Flows From Investing ActivitiesPlant Improvements ($20,600)

Cash Flows from Financing ActivitiesDividends PaidSales of Common Stock $2,000Purchase of Common StockCash from long term debt $5,500Retirement of long term debtChange in current debt (net) $10,406

Net cash from financing activities

Net change in cash position ($4,898)Closing cash position $0

How canyou makeaprofit

and still take ane-loan


Depreciation $3,253







profit

Issue bonds

increasedcapacity

Issue stock


Depreciation $3,253







Change inInventory

At a unit cost=$24, this is 338 units


Depreciation $3,253







Even with a profit …

too muchinventoryand a hugeinvestmentwith…

too little long termfinancing

and you haveto take ane-loan

how can i make a profit and still run out of cash? review financial statements cash flow and working...

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