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Cash Flow Management

Successful entrepreneurs usually concentrate their efforts on four key areas: vision, people, execution and cash.

“CASH IS KING”

• Understanding & Managing Cash Flow can make or break your business

• Cash Flow is the lifeblood of an operating business

• Young, growing companies are “cash sponges”

• A business can be earning a profit and be forced to close because it runs out of cash!

• Don’t just focus on sales or production. FOCUS on Cash Flow & ensuring that you have adequate cash

• Cash management – forecasting, collecting, disbursing, investing, and planning for the cash a company needs to operate smoothly

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PROFITABILITY & CASH FLOW

Why is this? Two reasons:• Business owners are often unrealistic in predicting their

cash flow. They tend to overestimate income and underestimate expenses.

• Business owners fail to anticipate a cash shortage and run out of money, forcing them to suspend or cease operations, even though they have active customers

More Businesses Fail for lack of Cash than lack of Profit

Difference between Profit & Cash Flow:• Profit is the difference between income & expenses. Calculated at the

time of sales being booked and making actual purchases/expenses• Cash flow is the difference between cash inflow (actual incoming cash)

and cash outflow (actual outgoing cash). Income is counted when customers pay and expenses are counted when payment is made, salaries paid to employees, taxes paid, and other cash expenses.

• Cash flow includes infusion of capital – owner putting cash into business, bank credit, investment by outside investors

CAUSES OF CASH FLOW PROBLEMS

What causes cash flow problems for growing businesses?• Too much focus on credit sales and not collecting from

customers on a timely basis• Seasonality • Unexpected variation due to changes in business

situations, economy, regulatory issues, etc• Weak Sales• Uncontrolled expenses• No cash flow projections & analysis• Fast growth coupled with poor cash management• Companies spend too much cash on building

infrastructure ahead of sales which fails to realize• Paying ahead of collecting cash!

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KEEP TABS ON CASH

• Know when cash is going to run out!• Manage your burn rate, if you are investing in new projects

or are a start-up• Control your working capital• Typically keep between 15-25% of your cash in a “rainy day

fund”

By having an accurate forecast, you will be able to judge your expenditure carefully, manage your working capital and seek

additional funding in good time.

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TIPS FOR MANAGING CASH FLOW

• Cash FLOW not Cash• Review Receivables & minimize credit sales• Initiate Inventory Analysis (if your business uses goods or sells products)• Negotiate aggressively with vendors & pursue group buying/bartering, etc.• Push Payables• Produce projections and review & refine constantly• Know the numbers• Business owners are often unrealistic in predicting their cash flow. They tend to

overestimate income and underestimate expenses. • Business owners fail to anticipate a cash shortage and run out of money,

forcing them to suspend or cease operations, even though they have active customers

Cash flow is the fuel that allows your business to continue operating and, more importantly, achieve growth. By managing

cash flow effectively, you can achieve significant gains over competitors

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KNOW YOUR NUMBERS!

You should be able to identify 2-3 critical elements that provide critical “health” information to you. Perhaps it’s units shipped, or

total sales calls, or conversion of customer inquiries, etc. You should identify these elements, determine the key threshold

numbers for them (on a weekly or monthly basis) and then be sure that reports are produced that allow you to gauge progress

and take appropriate actions.

OrderGoods

Day 1

ReceiveGoods

15

PayInvoice

40

14 25

218

178

SellGoods*

DeliverGoods

221

3

CustomerPays**

SendInvoice

230

9

280

50

Cash Flow Cycle = 240 days

* Based on Average Inventory Turnover:

365 days = 178 days 2.05 times/year

** Based on Average Collection Period:

365 days = 50 days 7.31 times/year

CASH FLOW CYCLE

CASH FLOW

Cash

Accounts Payable

Decrease in Cash

Production/Cash Purchases

Inventory

Accounts Receivable

Cash Sales

Increase in Cash

Leakage

Leakage

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CASH BUDGET

• A “Cash Budget” is an important tool for all business owners:– Amount & timing of cash receipts and cash disbursements over time

• Project & Refine the amount of cash a company will need to operate smoothly

• Cash budget can protect a company from being unprepared for seasonal fluctuations in cash flow or prepare a company to take advantage of business situations

• Your estimates should be based on your experience running your business and on your goals for your business over the time frame for which the budget is being created.

Advantages of Effective of Cash Management

• Increase amount and speed of cash inflows• Reduce the amount and speed of cash outflows• Proper & Effective debt & borrowing program• Plan debt repayments• Reduce borrowing costs by borrowing only when necessary• Make the most efficient use of available cash• Finance seasonal business needs• Provide funds for expansion• Plan for investing surplus cash

Dell Inc.’s Cash Conversion Cycle

Days’ InventoryOutstanding

5 days

Days’ Sales Outstanding30 days

Days’ Payable Outstanding71 days

Cash Conversion Cycle* = -36

days

Cash Conversion Cycle = Days’ Inventory + Days’ Sales Outstanding – Days’ Payable

= 5 + 30 – 71 = -36 days

Inventory Accounts Receivable

Accounts Payable

MANAGE WORKING CAPITAL

• Working capital equals:– Current assets minus current liabilities– Amount of cash that would remain if all short-term debt

was paid with the cash on hand

• If a firm runs out of working capital, it:– Will not be able to spend the cash needed to bring a new

product to market– Will still have ongoing bills to pay– May not be able to stay in business

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Vinod is a serial entrepreneur, consultant, CFO & investor who during his 15 year career in the US led companies through multiple financings, M&A and exits. He has taken two companies through NASDAQ listed offerings. His domain expertise includes technology, healthcare, outsourcing, services, food services, hospitality and manufacturing.

As a serial entrepreneur, he has cofounded companies in technology, services, outsourcing and hospitality. Successful exit with ROI to investors & founders.

Experience includes M&A, cross-border operations, business development, finance, startups, governance, IPO, management & operations

CFO of an early stage Venture Capital Fund in India; has helped raise more than US$100 million for two funds managed by the VC fund. Familiar with fund raising, LP relations, due diligence, deal making, portfolio management and reporting.

Founder of boutique consulting company that has worked with early and growth stage companies providing financial management, operations and strategy execution consulting. Clients include VC funds, US & European MNCs, etc.

MBA (JWU-US), MS – Finance (Bentley - US), CPA & CA . Angel Investor - member of Indian Angel Network. Co-founder, TiE Atlanta, Charter Member - TiE. Co-founder & Director – Atlanta Hitech CEO Council

VINOD KENI

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Vinod Kenivkeni@aquariangroup.com

+91-9845414179

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