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Cash Flow Management

Dr. Mark T. Schenkel

ETP 3700

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Cash Flow

“Cash is King”Life blood of businessCash flow related financial reports are most

important (even more important than Income Statement)

Understand cash versus accrual

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Figure 9-1Example of Cash Flow Cycle Over the Life Cycle of a Business

Profits

Cash flow

Start-up to Early Stage Growth Stage Maturity

0

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Reasons for Cash Flow Problems

Difficulty in collecting receivables (example)Seasonality of sales (example)Unexpected variation in sales Policies on how payments are made to suppliers

(example)Large expenditures up front for customer projects Capital projects Ineffective inventory management

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Measuring Cash Flow

Cash Flow from Operating Activities

Cash Flow from Investing Activities

Cash Flow from Financing Activities

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Bleed Rate

In periods of negative cash flow, entrepreneur must measure and understand the “bleed rate” of the venture

Bleed rate = monthly negative cash flowUnderstand source of bleed

If business has operating bleed focus on time to operating break-even

If business has operational positive cash flow, keep overhead and new fixed costs to a minimum until overall positive cash flow is achieved

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Time Out of Cash

Cash on Hand + Cash Available from Financing Sources TOC = _____________________________________________

Monthly Bleed Rate

Typically Measured in Months (sometimes in weeks or days)

Gives time measure of cash remaining

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Extending Time Out of Cash

Decrease bleed by cutting costsDecrease time to break-even by

accelerating sales growthIf pricing is inelastic, price increase

possibleRaise more money….

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Managing Cash During Inflation

Keep overhead low – Did I mention that Cash is King??

Build cash reserves to buffer short term price increases that precede higher prices on your part

Watch your margins carefully. Worry about growing profits, not sales

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Managing Cash During Inflation

Don't lock into long-term contracts that have narrow margins with large customers

When inflation heats up even a little, be aggressive with frequent small price increases rather than waiting and trying to catch up at some point with one big jump

Pay down variable interest loans ASAP to avoid interest rate hikes in the future