cash flow budgets

Budgeting in Tough Times:A Key Business Tool

Moderator: Arthur Sanders, CPASenior Partner: Israeloff, Trattner & Co.

Cash Flow Budgets

How to Use this Effective Planning Tool

Presented by:

Michael Buoncore, CPA – CFO

Posillico Civil, Inc.

Cash is KING

Operating vs. Cash Flow BudgetsWhat’s the difference?

• Operating Budget – A detailed projection of all estimated income and expenses based on forecasted sales for a given period. The operating budget focuses only on the components of the Income Statement.

• Cash Flow Budget – A detailed estimate of the timing of cash inflows and outflows over a given period. The cash flow budget focuses on the sources and uses of cash, which includes components of both the Income Statement and Balance Sheet.

Cash Flow BudgetsStatement of Cash Flows

Significant Sources of Cash

Cash sales Collection of accounts

receivable Loan proceeds Sales of FF&E Capital contributions

Significant Uses of Cash

Cash expenses Payment of accounts payable Loan repayments Purchases of FF&E Distributions / dividends Purchases of inventory/raw

materials

Cash Flow BudgetsItems to Improve Collections

• Be selective in choosing customers (KYC to CYA)• Use credit application• D&B report analysis• References (new, established and lost)• Better Business Bureau

• Know your customer’s accounts payable process• Flowchart their payment process• Payment cutoff dates• Personnel in process

• Accept credit/debit cards• Negotiate discounts for faster payment

Cash Flow BudgetsItems to Improve Payments

• Offer discounts for early payment

• Set specific day(s) that you cut checks• Keep the process in line with industry benchmarks• Eliminate late charges & penalties• Don’t pay vendors early due to personal relationships

• Wherever possible, match vendor payments with related cash collections

Cash Flow BudgetsThe Pains of Growth

Week Month 1 Month 2 Month 3 Month 4

Number Costs Billings Cash in Net cash Costs Billings Cash in Net cash Costs Billings Cash in Net cash Costs Billings Cash in Net cash

1 (1,350) (1,350) (1,350) (1,350) (1,350) (1,350) (1,350) (1,350)

2 (1,350) (1,350) (1,350) (1,350) (1,350) (1,350) (1,350) - (1,350)

3 (1,350) (1,350) (1,350) (1,350) (1,350) (1,350) (1,350) (1,350)

4 (1,350) 7,715 (1,350) (1,350) 7,715 (1,350) (1,350) 7,715 7,715 6,365 (1,350) 7,715 7,715 6,365

Monthly (5,400) 7,715 - (5,400) (5,400) 7,715 - (5,400) (5,400) 7,715 7,715 2,315 (5,400) 7,715 7,715 2,315

Cumulative   (5,400)   (10,800)   (8,485)   (6,170)

    Mth 1 YTD     Mth 2 YTD     Mth 3 YTD     Mth 4 YTD  

Revenue   7,715 7,715     7,715 15,430     7,715 23,145     7,715 30,860  

Cost of sales   5,400 5,400     5,400 10,800     5,400 16,200     5,400 21,600  

Gross profit   2,315 2,315     2,315 4,630     2,315 6,945     2,315 9,260  

Overhead   675 675     675 1,350     675 2,025     675 2,700  

Profit   1,640 1,640     1,640 3,280     1,640 4,920     1,640 6,560  

    21%                            

Assumptions: Salary: $1,000/wk; Benefits: $350/wk (35%); Profit Margin: 30%; Overhead Costs: $675/month; Client pays in 60 days

Cash Flow BudgetsHow Does the Bank Fit In?

• Your bank is not a vendor, but an critical partner in the cash flow equation.

• Debt options– Line of credit (fund working capital)– Fixed rate term debt (long term purchases)– Variable rate term debt (long term purchases)– Leases

Cash Flow BudgetsMeasurement Tools

• Every company is leveraged• A/P, Accrued expenses, Formal debt, commitments

• Working Capital (current assets – current liabilities)

• Current Ratio (current assets/current liabilities)

• Acid Test (Liquid) Ratio (Cash, A/R & investments/current liabilities)

• Days Cash (cash/daily cash expenses)

• Days Sales Outstanding (A/R / daily sales)

• Days Payable Outstanding (A/P / daily expenses)

OPERATING BUDGETS

IT IS HOW YOUR BUSINESS RUNS

Presented by: Marc P Palker, CMA

Managing Director-Madison Davis Professional Services, LLC

HOW IMPORTANT ARE BUDGETS?

• They make you think ahead

HOW IMPORTANT ARE BUDGETS?

• They make you think ahead

• They make you think about how your business runs

HOW IMPORTANT ARE BUDGETS?

• They make you think ahead

• They make you think about how your business runs

• They engage all levels of management

HOW IMPORTANT ARE BUDGETS?

• They make you think ahead

• They make you think about how your business runs

• They engage all levels of management

• They provide measurements to compare results

HOW IMPORTANT ARE BUDGETS?

• They make you think ahead

• They make you think about how your business runs

• They engage all levels of management

• They provide measurements to compare results

• They allow for new products, services, and divisions to be tracked

HOW CAN BUDGETS BE ORGANIZED?

• Product

HOW CAN BUDGETS BE ORGANIZED?

• Product

• Service

HOW CAN BUDGETS BE ORGANIZED?

• Product

• Service

• Division

HOW CAN BUDGETS BE ORGANIZED?

• Product

• Service

• Division

• Location (state, region, country)

HOW CAN BUDGETS BE ORGANIZED?

• Product

• Service

• Division

• Location (state, region, country)

• Sales executives

HOW CAN BUDGETS BE ORGANIZED?

• Product

• Service

• Division

• Location (state, region, country)

• Sales executives

• Any combination of the above

How do you want to measure your business?

• Key Performance Indicators» Total Sales» Unit Sales» Gross Margin» Expense Ratios» Pretax Income» Net Income» Cash Flow» Non GAAP Measures

Types of Budgets

• Budgets can be prepared based on the previous year or years.

Types of Budgets

• Budgets can be prepared based on the previous year or years.

• Zero based budgeting.

Types of Budgets

• Budgets can be prepared based on the previous year or years.

• Zero based budgeting.

• Rolling budgets.

Types of Budgets

• Budgets can be prepared based on the previous year or years.

• Zero based budgeting.

• Rolling budgets.

• Periodic updating.

Management Involvement

• The more departments that are involved in the budgeting process the better the ownership in the process. When results are reported you really do not want to hear,

• “It is not my budget, it’s your budget”

Budget Cycle(assumes December 31, year end)

September 30(9 months results)

Budget Cycle(assumes December 31, year end)

September 30(9 months results)

Templates Distributed

Budget Cycle(assumes December 31, year end)

September 30(9 months results)

Templates Distributed

Preliminary Budget

Budget Cycle(assumes December 31, year end)

September 30(9 months results)

Templates Distributed

Preliminary Budget

Revised Budget

Budget Cycle(assumes December 31, year end)

September 30(9 months results)

Templates Distributed

Preliminary Budget

Revised Budget

Final Budget

Budget Templates

• When designing budget templates you first must decide the level of detail you want.

• Based on that decision, you must provide that level of detail in the historical information.

• Information needed to make intricate calculations should be programmed and locked in the spreadsheets.

Analysis

• Why do I need to look at the comparison to the previous year?

Analysis

• Why do I need to look at the comparison to the previous year?

• What is the relationship to that comparison and the comparison to the budget?

Analysis

• Why do I need to look at the comparison to the previous year?

• What is the relationship to that comparison and the comparison to the budget?

• Who should these reports be distributed to?

Analysis

• Why do I need to look at the comparison to the previous year?

• What is the relationship to that comparison and the comparison to the budget?

• Who should these reports be distributed to?

• Should meetings be held in conjunction with the issuance of these reports?

Monitoring Your Business

Presented by:

Manny Cafiero, CPA – CFO

Scales Industrial Technologies, Inc.

Understanding Your Business

Understanding Your Changing Environment

Questions You Need To Answer

1) What issues keep you up at night?

2) Does your business have stated goals and objectives?

3) Do you have effective leaders and management?

4) Are people willing to change? (especially leaders)

5) Are there pressures on the business? (Ex: Make more money)

Is Your Company Focus Still Relevant?

What New Factors Should We Consider?

External

Internal

Developing Your Critical Success Factors(CSF’s)

CSF’s are what your business MUST get right to be successful

CSF’s cover Financial & Non-Financial Areas

• Cash Levels

• Management Succession

• Customer Satisfaction

• Employee Retention

• A/R Collection

• Inventory Turns

• Profitability

• Billing per Employee

Monitoring• How do you know if you are successful and

meeting our objectives?• You must have Key Performance Indicators

(KPI’s) to measure your progress.• KPI’s are:

– Financial & Non-Financial– Have little chance of producing erroneous

results– Timely and easy to obtain

Areas to Monitor

• Cash– Daily Cash Level– Cash Projections – A/R Aging & DSO– Inventory Levels & Turns– A/P Terms

“Cash Is King”

Revenue• Sales

– Backlog Reports– Bookings– Billings

• Service operations– Hours Billed vs. Hours Paid – Open Calls– Covered Calls– Repeat Calls– Over Time Reports

Financial Statements

• Comparisons– Year to Year– As a % of Sales– Actual to Budget

• Ratios– Gross Profit Analysis– Gross Profit Divided by Employment– Contribution Margins– Profit as % of Sales

YTD

Non-Financial Areas

• Customer Satisfaction• Warrantees• Repeat Calls• Lost Sales• Vendor Relationships• Employee Communication• Employee Satisfaction• Employee Rewards vs. Company Goals

Actions

• Some indicators require a limited action

• Some are more predictive in nature

• Some require immediate action

• Some are life threatening

What Do the Indicators Mean

Focus – It’s a Balance

ProfitsProfits Customer Customer ServiceService

• Gross ProfitGross Profit

• Inventory TurnsInventory Turns

• Labor EfficiencyLabor Efficiency

• Better PurchasingBetter Purchasing

• Maximize Sales PriceMaximize Sales Price

• CollectionsCollections

• QualityQuality

• Response TimeResponse Time

• Availability of Parts and LaborAvailability of Parts and Labor

• Technical AbilityTechnical Ability

• Exceed ExpectationsExceed Expectations