1. Cash Flow Management Mark Davidson

2. What is Cash Flow? “Cash receipts less cash payments over a period of time” How does it differ from profits? Timing of expenditures Timing of receipts

3. Why do we need a Cash Flow? Most people realise the importance of establishing and sticking to a household budget. This is the best way to make sure that household expenditures do not exceed income during the month, forcing families and individuals to have to borrow money, use overdraft facility, or use credit cards to make ends meet. Why should businesses be any different?

4. With profit: This results in timing differences which should be recognised and planned for You might purchase an asset, but some of all of it is not immediately expensed You might pay for it at a later date – 30, 60 or even 90 days, or…… You might sell an asset, but not get the money right away

5. Example 1: Your business buys a computer costing £3,600 on the 1 st January 2013. This computer has an economic benefit of, say, 3 years. You pay for it on the 1 st January. Cash flow 1 st January 2013: - £3,600 Profit 1st January 2013: £0 Cash flow 31 st January 2013: - £3,600 Profit 31st January 2013: - £100 Cash flow 31 st December 2016: - £3,600 Profit 31 st December 2016: - £3,600

6. Example 2: As Example 1, except you pay for it on the 28 th February 2013 Cash flow 1 st January 2013: £0 Profit 1st January 2013: £0 Cash flow 31 st January 2013: £0 Profit 31st January 2013: - £100 Cash flow 28 th February 2013: - £3,600 Profit 28 th February 2013: - £200 Cash flow 31 st December 2016: - £3,600 Profit 31 st December 2016: - £3,600

7. Example 3: You sold a computer on 1 st January 2013 for £3,600 which cost you £2,000 in 2012. Customer pays in full on 31 st March 2013 Cash flow 1 st January 2013: £0 Revenue £3,600 Expenses £2,000 Profit £1,600 Cash flow 31 st March 2013: £3,600 Revenue £3,600 Expenses £2,000 Profit £1,600

8. Would Michael Dell @ Dell Computers or Bill Gates @ Microsoft really care? Probably not! Should you? Probably yes! Probably not with 1 but maybe with 10, 20, 50 or 100?

9. “Business Breaker’s yard” Couldn’t generate enough cash for: – Inventory – Marketing – Infrastructure (back office stuff) – To live on ……. ~ or ~ The cash came at the wrong time, or all at once and wasn’t managed properly….. A concept which was fantastic! Could make tons of profit!

10. Cash Flows form part of a Business Plan A Business Plan is essentially: Where you are Balance Sheet Where you think you can get to Profit & Loss How you are going to get there “Talk” translates into Cash Flow

11. How to put together a cash flow a) Service industry (sells services): – Identify your clients/LOB and the associated spending & payment patterns; – Start with when they purchase your services, then; – Determine when they pay for those services. – Identify your monthly expenditures i.e. staff, vehicle running costs, rent, etc (generally stuff that doesn’t vary too much) – Capital expenditures – what you’re purchasing and when you’re paying for it (this will vary) That gives you cash inflows (from operations). Then,

12. How to put together a cash flow (cont’d) b) Goods/manufacturing industry (sells goods): – Identify your clients/LOB etc.(as before); – Start with when they purchase your goods (as before); – Determine when they pay for those goods (as before). That gives you cash inflows (from operations). Then, – Look at when you need to purchase either goods for resale or inputs to the manufacturing process, then; – Determine when you can pay for them. – Identify your monthly expenditures (as before); – Capital expenditures (as before)

13. Things to remember The VAT man The tax man Pay yourself! When you put it all together it should look something like this:

14. Cashflow Budget For the Period Ending 31st March 2014 Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Total Billing 74.4 133.2 178.0 197.3 153.0 174.5 182.5 205.4 191.0 189.5 196.1 494.3 2,369.2 ACollection 282.1 301.4 326.0 284.0 235.1 192.0 176.3 163.3 170.9 175.5 181.9 185.6 2,674.1 BDebtors > 6 mths (exc Bad Debt) 41.4 34.1 21.9 12.2 7.3 4.9 243.6 CFee Collections (A + B) 323.5 342.8 360.1 318.1 257.0 213.9 188.5 175.5 178.2 182.8 186.8 190.5 2,917.7 DInterest 0.1 0.8 ETotal Cash Inflow (C + D) 323.6 342.9 360.2 318.2 257.1 214.0 188.6 175.6 178.2 182.8 186.8 190.5 2,918.5 FStaff Costs 108.6 184.4 117.0 108.6 167.0 106.1 166.1 106.1 166.1 1,550.8 GPremises Costs 43.8 525.6 HOffice Expenses 4.7 14.8 4.7 14.8 4.7 14.8 4.7 14.8 4.7 96.8 IOther Expenses 25.8 14.8 22.8 14.8 196.6 JCapital Expenditure 3.4 13.2 3.4 13.2 3.4 150.0 13.2 3.4 13.2 226.6 KVAT 83.5 78.5 50.0 87.1 299.1 LCorporation Tax 100.0 MLoan Repayments (Capital) 25.5 10.0 182.0 NLoan Repayments (Interest) 1.1 0.4 7.6 PTotal Cash Outflow (F to N) 296.4 212.0 287.5 288.8 195.8 361.9 233.2 339.9 253.0 270.3 193.3 253.0 189.6 Net Cash Position Monthly (E - P) 27.2 130.9 72.7 29.4 61.3- 147.9- 44.6- 164.3- 74.8- 87.5- 6.5- 62.5- 266.6 Cumulative 150.0 177.2 308.1 380.8 410.2 471.5 323.6 279.0 114.7 39.9- 47.6- 54.1- 116.6 Overdraft interest nil - 0.2 - 0.5

15. What does this show? Cash flow peaks Cash flow troughs When you need to have a chat with your bank!

16. In summary, you need a cash flow projection! Predict when cash shortfalls may occur, enabling you to plan in advance if you will need to secure financing, tap into a line of credit or make adjustments to your payables schedule; In summary, increase your overall financial control Reduce interest expenses by planning financing needs well in advance Plan large expenditures (incl. CAPEX) more strategically, rather than being caught unprepared when needs arise;

17. Finally, some tips… Set yourself time to do a proper cash flow projection – you’ll be glad you did; Questions? You do not have to be paid in arrears! It’s ok to ask for some money up front or during the course of the work (if applicable); Credit control is not a bad word.