Cash Flow Management For Growth By Ron Bernstein

MEET U.S. Agenda I.Profit and Cash are NOT the Same II.Monitoring Cash Flow with Ratios III.Link Between Growth and Cash IV.Operating Tactics for 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. Cash≠ Profit Cash ≠ Profit Cash Is needed to provide Working Capital Profit is calculated before cash is received Monthly operating costs reduce cash Ignored possible cash from 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 represents a 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

MEET U.S. Inventory Turnover  Divide Cost of Goods Sold by Ending Inventory Balance Measures the number of times per year material moves through inventory

MEET U.S. 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 Cash Additional Receivables Additional Equipment & Facilities Additional Inventory

MEET U.S. Growth and Cash Flow - Lessons Growth requires cash Projections identify cash needs Ratios help in making projections Plan ahead!

MEET U.S. 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