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Cash Flow Management
For Growth
ByRon Bernstein
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MEET U.S.
Agenda
I.I. Profit and Cash are NOT Profit and Cash are NOT the Samethe Same
II.II. Monitoring Cash Flow Monitoring Cash Flow with Ratioswith Ratios
III.III. Link Between Growth Link Between Growth and Cashand Cash
IV.IV. Operating Tactics for Operating Tactics for Maximizing Cash Flow Maximizing Cash Flow
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MEET U.S.
Sources & Uses of Cash
• Investors – Equity• Lenders – Liabilities• Operations
– Profit – Income Statement– Working Capital – Balance Sheet
• Assets– Property, Plant & Equipment
Income Statement and Balance Sheet can be both
Sources & Uses of Cash
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MEET U.S.
Typical Cash Flow – Young Company
• Sources of Cash– Investors – Equity– Lenders – Liabilities
• Uses of Cash– Investment – Purchase Equipment
& Facilities - Assets– Operations
• Losses – Income Statement• Working Capital – Purchase Material &
Increase Receivables – Assets
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MEET U.S.
Typical Cash Flow – Growth Company
• Sources of Cash– Operations – Profit– Lenders – Additional Debt– Investors – Additional Equity
• Uses of Cash– Investment in Fixed Assets– Operations – Working Capital
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MEET U.S.
Typical Cash Flow – Mature Company
• Sources of Cash
– Operations - Profit
• Uses of Cash
– Investors – Dividends
– Lenders – Repay Debt
• Minimal Cash Flow In/Out– Investment/Sale of Fixed Assets– Operations – Working Capital
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MEET U.S.
Typical Cash Flow – Company in Trouble
• Sources of Cash– Sale of Fixed Assets– Lenders (maximize borrowing)– Investors (as much as investors
are willing or able to invest)• Uses of Cash
– Operations – Losses– Operations – Increased Working
Capital (Out of Control)
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MEET U.S.
What Have We Seen So Far?
Profit Is Only One Component of Cash Flow
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MEET U.S.
Profit versus Cash – an Example
• Cash paid when product is produced – 1-3 months before shipment (sale)
• Cash received 1-2 months after product shipped• Profit (Revenue – Expense) recorded at time of
shipment
Profit and Cash are NOT the same
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MEET U.S.
CashCash ≠ Profit≠ Profit Cash Is needed to Cash Is needed to provide Working provide Working
CapitalCapital
Cash Is needed to Cash Is needed to provide Working provide Working
CapitalCapital
Profit is calculated Profit is calculated before cash is before cash is
receivedreceived
Profit is calculated Profit is calculated before cash is before cash is
receivedreceived
Monthly operating Monthly operating costs reduce cashcosts reduce cash
Monthly operating Monthly operating costs reduce cashcosts reduce cash
Ignored possible cash Ignored possible cash from lenders or investorsfrom lenders or investors
Ignored possible cash Ignored possible cash from lenders or investorsfrom lenders or investors
Conclusions from Our Example
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MEET U.S.
• Accounts Receivable• Inventory• Accounts Payable• Accrued Expenses Payable
What Is Working Capital?
Money needed to fund the daily operations
of the company
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MEET U.S.
Working Capital Affects Cash
• Cash Will INCREASE If:– Collect (reduce) Receivables– Reduce Inventory– Increase Accounts Payable– Increase Accrued Payables
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MEET U.S.
Working Capital Affects Cash
• Cash Will DECREASE If:– Increase
Receivables– Increase Inventory– Reduce (Pay)
Accounts Payable– Reduce (Pay)
Accrued Payables
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MEET U.S.
Formula for Working Capital
(+) Accounts Receivable
(+) Inventory
(-) Accounts Payable
(-) Accrued Payables
= Working Capital
Working Capital representsa need for Cash.
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MEET U.S.
Tools for Monitoring Cash Flow
• Days Sales Outstanding
• Inventory Turnover
• Accounts Payable Days
Ratios
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MEET U.S.
Days Sales Outstanding
Determine Average Sales/Day Sales for last 3 months ÷
Number of Days in last 3 months
Divide Receivables Balance by Average Daily Sales
Measures the number of days required to collect on a sale
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MEET U.S.
Days Sales Outstanding
• Lower is better (generally)• If Invoice Payment Terms are Net
30, Days Sales Outstanding < 45 Days is GOOD
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MEET U.S.
Inventory Turnover
Divide Cost of Goods Sold by Ending Inventory Balance
Measures the number of times per year material moves through
inventory
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MEET U.S.
Inventory Turnover
• Higher is better
• Manufacturing Company:
–2 = poor
–4 = average
–6-8 = good
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MEET U.S.
Accounts Payable Days Outstanding
Determine Average Purchases/Day– Cost of Goods Sold for last 3 months ÷ Number of Days in last
3 months
Divide Accounts Payable Balance by Average Daily Purchases
Measures the number of days required to pay a typical vendor
invoice
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MEET U.S.
Accounts Payable Days Outstanding
• A high figure Trouble!• If Vendor Terms = Net 30, then Accounts
Payable Days should be < 40 Days• If A/P Days > 60 Days, Vendors see a problem
and may cut off credit
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MEET U.S.
Ratio Analysis
• Analyze the ratios– Are the values excellent,
average or poor?• Analyze the trend
– Look at a series of calculations of the same ratio at different periods of time
– Is the trend getting better or worse?
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MEET U.S.
Growth and Cash Flow
Growth Requires Growth Requires CashCash
Additional Additional ReceivablReceivabl
eses
AdditionaAdditional l
EquipmenEquipment & t &
FacilitiesFacilitiesAdditionAddition
al al InventorInventor
yy
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MEET U.S.
Growth and Cash Flow - Lessons
• Growth requires cash
• Projections identify cash needs
• Ratios help in making projections
• Plan ahead!
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MEET U.S.
Strategies & Tactics to Maximize Cash Flow
CASH IS KING
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MEET U.S.
Strategies & Tactics to Maximize Cash Flow
• Form a Committee from each operational area
• Revise department plans if necessary
Communicate!
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MEET U.S.
Strategies & Tactics to Maximize Cash Flow
• Cancel or delay Purchase Orders for parts not needed
• Arrange extended payment terms
• Return/sell obsolete parts
Purchasing
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MEET U.S.
Strategies & Tactics to Maximize Cash Flow
• Delay marketing efforts until ready for production
• Focus on selling products that can be shipped (and be paid for!) now
Marketing and Sales
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MEET U.S.
Strategies & Tactics to Maximize Cash Flow
• Call customers when their receivable is 35 days old
• Immediately resolve any issues that customers have
• Hold shipments to customers who are late paying previous invoices
Cash collections
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MEET U.S.
Strategies & Tactics to Maximize Cash Flow
• Pay vendors by priority:– 1-Government – 2-Employees– 3-Utilities– 4-Sole Source Vendors– 5-Repeat Vendors– 6-One-time Vendors
Vendor payment
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MEET U.S.
Strategies & Tactics to Maximize Cash Flow
• Project dates to pay for each invoice• Communicate that date when asked• Pay the invoice on the promised date!
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MEET U.S.
Strategies & Tactics to Maximize Cash Flow
• Concentrate on quick shipment projects• Focus on completing new designs• Minimize Engineering Changes – many
additional costs
Engineering(Research and Development)
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MEET U.S.
Strategies & Tactics to Maximize Cash Flow
• Produce products that can be shipped immediately
• Minimize “Work In Process”
Manufacturing
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MEET U.S.
Summary
• Profit ≠ Cash
• Monitor and project Cash Flow with ratios
• Growth requires cash
• Projecting cash needs for growth is important
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MEET U.S.
Conclusion
Managing operations to maximize Cash Flow reduces the likelihood of a Cash Crisis