Cash Flow Management

q Why cash flow? q What is cash flow? q Cash flow analysis q An eight step approach

Why Cash Flow?

Controlling Your Cash Before It Controls You

q  In an ever-changing market, be ready to respondq  You have choices

q  Reactive Managementq  Changes come from the outside, the business passively

respondsq  Proactive Management

q  The business anticipate problems, and forms strategies

What Is Cash Flow?

Flows of cash:q  In-flow

q  New investmentq  New debtq  Sale of fixed assetsq  Operating profits

q  Out-flowq  Income statement expensesq  Principal portion of loans

What Is Cash Flow?

Five severe warning signs of cash flow:

1.  Decreased liquidity2.  Overtrading3.  Over-reliance4.  Dropped discounts5.  Slow collections

If you suffer from one or more of these, you have a cash flow problem!

Cash Flow Analysis?

Objective – profitable business planning & operation

q  If cash in-flows exceed cash out-flows, your business can continue

q  If cash outflows exceed cash inflows, your business grinds to a halt

Cash Flow: The Eight Steps

1.  List cash in-flows2.  List cash out-flows3.  Identify when cash flows in or out4.  Examine timing: cash in-flows minus cash out-flows5.  Identify major consequences of cash as it currently

flows6.  Show constraints: cash in-flows and out-flows that

cannot be changed7.  Identify in-flows and out-flows that can be changed or

rescheduled8.  Establish a plan for positive cash flow

Step 1: List Cash In-flows

q  Focus on operations as your main source of cashq Timing is everything

Timing and operations go together

Cash Flow Analysis

Cash  

Purchases  

Inventories  Sales  

Receivables  

The Cash Flow Cycle

Notice the direction of the arrow. This is how cash flow can be a problem.

Step 2: List Cash Out-flows (Uses)

q  Start with your cash journal and checkbookq Where is the cash going?

q  In-flows are a bit faster than out-flows, but they must balanceq  Again, timing is everything!

q Maintain an accounting system –q Make sure your accountant works for and with you

Step 3: Identify When Cash Flows In or Out

q  Calendar: useful toolq  List by date major cash in-flows and out-flowsq  List fixed out-flows that have fixed datesq  List cash in-flows by date

Objective – Identify your business cycle and balance in-flows and out-flows to allow growth

Step 4: Examine Timing: Cash In-flows Minus Out-flows

q  Know your business rhythm

q  Know your business cycle

q  Are you in phase or out

q  Look for industry data

q  Try your trade association

q  Don’t forget the US Small Business Administration (SBA)

Step 4: Examine Timing: Cash In-flows Minus Out-flows

Business Growth Patterns

Step 4: Examine Timing: Cash In-flows Minus Out-flows

Business Growth Patterns

Step 5: Identifying The Major Consequences Of Cash As It Currently Flows

q  Plan on payments being slower than you expect

q Learn your own cash flow pattersq They will become the foundation for your plan

q Can you really afford to offer credit?

q Leave credit decisions to professionals

Step 6: Show Constraints: In-flows or Out-flows That Cannot Be Changed

q  Which payment schedules can be changed – and which cannot?

q List inflexible out-flows; plan around them

q Cash in-flows – not all can be influencedq  Identify those that create snags and deal with them on a one-by-one basis

Step 7: Identify In-flows and Out-flows Which Can Be Changed or Rescheduled

q  Delayed payments are one way to improve cash flow

q Negotiate with your creditorsq They may be more flexible than you might guess

q  It’s a balance and can be accomplishedq Careful planning

Step 8: Establish A Plan For Positive Cash Flow

q  Go back to your calendar in Step 3 and provide more detail

q  Indicate cash flow items that cannot be changedq  List anticipated cash in-flows allowing a margin

of safetyq  Allocate payment dates to suit your business

needsq  Identify periods of negative cash flow and how

to subsidize

Cash Flow Management

~ Q&A ~