DKH Enterprises, Inc. Managing Cash: A Startup’s First Financial Priority “cash and no profits is better than profits and no cash”

DKH Enterprises, Inc. June 2007 DKH Enterprises, Inc. Business Advisors 2 Financial Reporting vs. Managerial Accounting CFO TreasurerController Credit Inventory Investments External reporting Planning & Budgeting Accounting Cost Audit Internal reporting

DKH Enterprises, Inc. June 2007 DKH Enterprises, Inc. Business Advisors 3 Cash Management Determine working capital needs –Sources of cash and policies/timing of receipts –Uses of cash: Inventory conversion cycle – time cash tied up/supplier terms Selling and marketing costs Overhead costs –Timing/policies for cash payments Develop a Cash Budget Accelerate cash conversion process

DKH Enterprises, Inc. June 2007 DKH Enterprises, Inc. Business Advisors 4 Developing a Cash Budget Determine the way in which cash flows through the business Build a model that incorporates realistic assumptions about how your business really works Track actuals to budget frequently in order to respond in an effective timeframe Build flexibility to adjust assumptions as business experience changes

DKH Enterprises, Inc. June 2007 DKH Enterprises, Inc. Business Advisors 5 Sources & Uses of Cash Sources of Cash; Cash from Sales Cash from Debt or Equity Cash from Investments Uses of Cash: Buy and convert raw materials Sell products Pay bills for overhead Long-term: pay off debt; expand (new products); contingencies

DKH Enterprises, Inc. June 2007 DKH Enterprises, Inc. Business Advisors 6 Cash from Sales % accounts receivable (AR) paid in cash (credit cards, wire transfers, etc.) Credit terms % AR paid in 15, 30, 45, 60 days and so on Isolate large account experience % bad debt

DKH Enterprises, Inc. June 2007 DKH Enterprises, Inc. Business Advisors 7 Cash Needed for Operations Cost of goods –Supplier payment terms –Conversion costs: Labor Co-packer Shipping Warehousing –Cycle time Selling costs –Travel –Trade events –Sales materials –Promotions and programs G& A Expenses –Payroll –Rent/Utilities Pay off Debt Invest in product development

DKH Enterprises, Inc. June 2007 DKH Enterprises, Inc. Business Advisors 8 Increase Cash Flow Speed Collections –Invoice ASAP –Offer incentives for early pay/prepay –Accept credit cards –Deposit checks, then enter –Inventory and PO financing Reduce Order Quantities/Cycle Time –Supplier lead-times –Transit times –Reduce finished goods inventory Slow Payments –Negotiate supplier terms –Use credit cards or other credit facility

DKH Enterprises, Inc. June 2007 DKH Enterprises, Inc. Business Advisors 9 Cash Conversion Cycle 1.Inventory conversion 2.Days sales outstanding 3.Payables deferral 4.Cash conversion cycle: days to convert raw materials and to receive cash from customers

DKH Enterprises, Inc. June 2007 DKH Enterprises, Inc. Business Advisors 10 Cash Conversion Measure 1.Inventory conversion = Inventory/Sales per Day 2.Days sales outstanding = Accounts receivable/ Sales per day 3.Payables deferral = Accounts Payable/ Cost of Goods Sold/365 Cash conversion cycle = (1+2)-3