How can I make a profit and still run out of cash? Review Financial Statements Cash 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 business renting $ 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 Selling inventory ==> cash & accts receivable

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

operating working capital operating working capital Balance Sheet ASSETS2008 Cash $0 Accounts Receivable $5,916 Inventory$8,120 Total Current Assets$14,306 Plant & Equipment$48,800 Accumulated Depreciation ($11,181) Total Fixed Assets$37,619 Total Assets$51,655 LIABILITIES & OWNER'S EQUITY Accounts Payable$4,926 Current Debt$11,273 Long Term Debt$15,833 Total Liabilities$32,032 Common Stock$4,313 Retained Earnings$15,310 Total Equity$19,623 $51,655Total Liabilities & Equity 4,898 4,940 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,

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)

Where is the Working Capital? 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)

Where is the Working Capital? 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

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 operating working capital operating working capital Balance Sheet ASSETS2008 Cash $0 Accounts Receivable $5,916 Inventory$8,120 Total Current Assets$14,306 Plant & Equipment$48,800 Accumulated Depreciation ($11,181) Total Fixed Assets$37,619 Total Assets$51,655 LIABILITIES & OWNER'S EQUITY Accounts Payable$4,926 Current Debt$11,273 Long Term Debt$15,833 Total Liabilities$32,032 Common Stock$4,313 Retained Earnings$15,310 Total Equity$19,623 $51,655Total Liabilities & Equity 4,898 4,940 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,

Business Activities

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 operating working capital operating working capital Balance Sheet ASSETS2008 Cash $0 Accounts Receivable $5,916 Inventory$8,120 Total Current Assets$14,306 Plant & Equipment$48,800 Accumulated Depreciation ($11,181) Total Fixed Assets$37,619 Total Assets$51,655 LIABILITIES & OWNER'S EQUITY Accounts Payable$4,926 Current Debt$11,273 Long Term Debt$15,833 Total Liabilities$32,032 Common Stock$4,313 Retained Earnings$15,310 Total Equity$19,623 $51,655Total Liabilities & Equity 4,898 4,940 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,

Balance Sheet ASSETS2008 Cash $0 Accounts Receivable $5,916 Inventory$8,120 Total Current Assets$14,306 Plant & Equipment$48,800 Accumulated Depreciation ($11,181) Total Fixed Assets$37,619 Total Assets$51,655 LIABILITIES & OWNER'S EQUITY Accounts Payable$4,926 Current Debt$11,273 Long Term Debt$15,833 Total Liabilities$32,032 Common Stock$4,313 Retained Earnings$15,310 Total Equity$19,623 $51,655Total Liabilities & Equity 4,898 4,940 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, What changed as a result of the year’s operations?

Balance Sheet ASSETS2008 Cash $0 Accounts Receivable $5,916 Inventory$8,120 Total Current Assets$14,306 Plant & Equipment$48,800 Accumulated Depreciation ($11,181) Total Fixed Assets$37,619 Total Assets$51,655 LIABILITIES & OWNER'S EQUITY Accounts Payable$4,926 Current Debt$11,273 Long Term Debt$15,833 Total Liabilities$32,032 Common Stock$4,313 Retained Earnings$15,310 Total Equity$19,623 $51,655Total Liabilities & Equity 4,898 4,940 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, 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

Balance Sheet ASSETS2006 Cash $0 Accounts Receivable $5,916 Inventory$8,120 Total Current Assets$14,306 Plant & Equipment$48,800 Accumulated Depreciation ($11,181) Total Fixed Assets$37,619 Total Assets$51,655 LIABILITIES & OWNER'S EQUITY Accounts Payable$4,926 Current Debt$11,273 Long Term Debt$15,833 Total Liabilities$32,032 Common Stock$4,313 Retained Earnings$15,310 Total Equity$19,623 $51,655Total Liabilities & Equity 4,898 4,940 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, 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 term financing profit re-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 Activities Net Income (Loss)$2,631 Adjustment for non-cash items Depreciation$3,253 Change in Current Assets and Liabilities Accounts Payable$1,025 Inventory($8,120) Accounts Receivable($976) Net cash from operations Cash Flows From Investing Activities Plant Improvements($20,600) Cash Flows from Financing Activities Dividends Paid Sales of Common Stock$2,000 Purchase of Common Stock Cash from long term debt$5,500 Retirement of long term debt Change in current debt (net)$10,406 Net cash from financing activities Net change in cash position ($4,898) Closing cash position $0 How can you make a profit and still take an e-loan

Cash Flows from Operating Activities Net Income (Loss)$2,631 Adjustment for non-cash items Depreciation$3,253 Change in Current Assets and Liabilities Accounts Payable$1,025 Inventory($8,120) Accounts Receivable($976) Net cash from operations Cash Flows From Investing Activities Plant Improvements($20,600) Cash Flows from Financing Activities Dividends Paid Sales of Common Stock$2,000 Purchase of Common Stock Cash from long term debt$5,500 Retirement of long term debt Change in current debt (net)$10,406 Net cash from financing activities Net change in cash position ($4,898) Closing cash position $0 profit Issue bonds increased capacity Issue stock

Cash Flows from Operating Activities Net Income (Loss)$2,631 Adjustment for non-cash items Depreciation$3,253 Change in Current Assets and Liabilities Accounts Payable$1,025 Inventory($8,120) Accounts Receivable($976) Net cash from operations Cash Flows From Investing Activities Plant Improvements($20,600) Cash Flows from Financing Activities Dividends Paid Sales of Common Stock$2,000 Purchase of Common Stock Cash from long term debt$5,500 Retirement of long term debt Change in current debt (net)$10,406 Net cash from financing activities Net change in cash position ($4,898) Closing cash position $0 Change in Inventory At a unit cost=$24, this is 338 units

Cash Flows from Operating Activities Net Income (Loss)$2,631 Adjustment for non-cash items Depreciation$3,253 Change in Current Assets and Liabilities Accounts Payable$1,025 Inventory($8,120) Accounts Receivable($976) Net cash from operations Cash Flows From Investing Activities Plant Improvements($20,600) Cash Flows from Financing Activities Dividends Paid Sales of Common Stock$2,000 Purchase of Common Stock Cash from long term debt$5,500 Retirement of long term debt Change in current debt (net)$10,406 Net cash from financing activities Net change in cash position ($4,898) Closing cash position $0 Even with a profit … too much inventory and a huge investment with… too little long term financing and you have to take an e-loan