How to Manage and Improve Your Companys Cash Flow

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How to Manage and Improve Your Companys Cash Flow

• Neil Shnider, RPh, MBA, CPA

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Cash Management

• GM now running leaner, faster
• Detroit New (Nov 1997)
• Management is driven completely by the amount of
  cash that goes into this business and the amount
  of cash that goes out, said John Cassesa. For
  the longest time, the management of GM didnt
  understand that.
• John Casesa, auto analyst for Schroder Co. in
  New York

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Cash Management

• General Electric recently announced that CEO
  Jeffrey Immelt will receive a new form of
  compensation tied to performance targets achieved
  over five years.
• PSU (Performance stock units)
• Half of the PSUs convert into GE stock only if GE
  achieves 10 percent average annual growth in net
  cash from operating activities over the period
• Half is converted only if total shareholder
  return meets or beats the SP 500
• Columbus Dispatch October 19, 2003

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Profit is not cash

• Profit is an accountants abstraction

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Profit v. Cash

• Profit is Revenue - Expenses
• Cash is Receipts - Disbursements

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Cash Management
Financial Statements

• Income Statement
• Revenue
• Expenses
• Balance Sheet (Statement of Financial Position)
• Assets
• Liabilities
• Owners Equity

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Cash Management
Financial Statements

• Statement of Cash Flow
• Three Parts
• Cash flow from operations
• Cash flow from investments
• Cash flow from financing
• How did I use of my cash?

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Cash Flow Management Working Capital Control

• Accounts Receivables
• Inventory
• Accounts Payable

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Cash Management Working Capital

• Current assets current liabilities
• (A/R Inventory) Payables
• Not liquid, cant be used to pay bills
• Opportunity cost

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Cash

• Is not Net profit depreciation
• Is Net Profit
• Depreciation
• -Increases (or Decreases) A/R
• -Increases (or Decreases) Inventory
• Increases (or Decreases) A/P
• -Decrease (or Increases) Notes Payable
• Net Cash Flow from operations

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Cash Management

• Scenario
• Beginning cash is 20,000
• Bought equipment for 20,000. Took out loan
• Buy 10,000 inventory on account for 30 days with
  2/10n30
• Sells inventory that cost 2,000 for 6,000 on
  account
• Records 200 of equipment depreciation
• Pays labor cost and administrative staff for the
  month 2,000
• Pays rent and utility bills of 800
• Pays vendors 9,800 for inventory purchased

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Cash Management
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Cash Management
20,000-(2,0008009,800)
10,000-(2002,000)
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Cash Management

• Cash Statement

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Cash Management
BREAK
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Cash Management

• Taking control of the businesss available cash
  and planning for its timely cash requirements.

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Cash Management

• Having adequate cash to meet operating and
  investment requirements
• Having adequate cash to grow/expand
• Having adequate cash to compensate
  investors/owners (you)

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CASH IS KING!
Out-of-Cash Out-of-Business
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Cash Management
CASH
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Cash Management

• Cash vs. Cash Flow
• Cash is ready money in the bank or in the
  business. It is not inventory, it is not accounts
  receivable (what you are owed), and it is not
  property. These can potentially be converted to
  cash, but can't be used to pay suppliers, rent,
  or employees

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Cash Management

• Cash vs. Cash Flow
• Cash flow refers to the movement of cash into and
  out of a business. Watching the cash inflows and
  outflows is one of the most pressing management
  tasks for any business. The outflow of cash
  includes those checks you write each month to pay
  salaries, suppliers, and creditors. The inflow
  includes the cash you receive from customers,
  lenders, and investors.

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Cash ManagementCash Flow

• Ideal situation
• Have cash inflow every time you have a cash
  outflow
• Real world
• Cash outflows occur at different times than cash
  inflows
• More often than not, cash inflows lag cash
  outflows
• Creates CASH GAP

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Cash Management

• Examine the timing of the cash inflows and cash
  outflows
• Examine the different components (elements,
  items) that have a direct effect on cash flow

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Cash Management

• Understanding the cash flow cycle
• Cash Reservoir
• Main flow is through
• Inventories
• Shipments to customers and accounts receivable
  and back to cash
• Everything else in the system is there to support
  this flow

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Cash Management

• Cash reservoir comes from
• Share owners
• Borrowing
• Marketable securities
• Current operation
• Fixed assets

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Cash Management

• Cash reservoir is used for
• Plant and equipment
• Operating expenses
• Inventory
• Accounts receivables
• Dividends
• Taxes
• Interest

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Cash Management
Cash Projections

• Sources of Cash
• Checking account balance at beginning of period
• Estimated cash sales
• Estimated collection of credit sales
• Other sources
• Borrowing anticipated
• increase in payables or debt
• increase in sale of assets

• Uses of Cash
• - Bills to be paid
• - Taxes to be paid
• - Loan payments
• - Assets to be purchased
• - Dividends to be paid

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Cash ManagementSources

• Where does cash come from?
• Internally
• profits (retained earnings)
• selling assets
• reducing inventories
• reducing receivables
• increasing payables
• Externally
• debt
• equity                           
                               

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Cash Management

• Cash In
• Cash sales
• Account receivables received
• Interest income
• Sale of assets
• Fixed
• Current
• Loan proceeds
• Borrowing-debt
• Stockholders investments

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Cash Management
Cash Out

• Advertising
• Bank Service Charges
• Credit Card Fees
• Delivery
• Health Insurance
• Other Insurance
• Interest paid
• Inventory purchases
• Office expenses
• Payroll
• Payroll taxes

• Professional Fees
• Rent of Lease
• Subscriptions Dues
• Supplies
• Taxes Licenses
• Utilities Telephone
• Capital Purchases
• Loan Repayment
• Owners withdrawal
• Retirement Other Benefits
• Suppliers

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Operating and Cash Cycle
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Cash Management

• Cash Conversion Cycle (Operating Cycle)
• The number of days it takes a company to purchase
  materials (inventory), convert it into finished
  goods, pay for the goods, sell the finished goods
  to a customer and receive payment from the
  customer

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Cash Management Managing Accounts Receivables

• Sales that have not yet been collected in the
  form of cash
• Creates negative (-) cash flow effects
• How long does it take for the average person to
  pay their bill?
• Credit policy
• Credit terms
• A/R to sales ratio

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Managing CashExample

• Accounts receivable Aging Schedule
• Measuring average collection period
• Billing 200,000 for the year and youre A/R
  outstanding is 20,000, then
• 20,000
• (200,000/365)

37 days
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Managing CashExample
Reduce the days outstanding (DOS) from 37 to
26 (11 days x 548.00) This increases the cash
available by over 6,000.00
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Cash Management
Lunch
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Cash Management Managing Inventory

• The extra merchandise or supplies the business
  keeps on hand.
• Uses up cash

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Cash Management Inventory

• Number of Days Inventory is on the Self.
• Number of Days to sell Inventory (DIO)
• Average Inventory
• (Cost of Goods Sold/365)

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Cash Management Inventory

• Cost of Goods Sold 73,000
• Average Inventory 8,000
• 73,000/365 200/day
• 8,000/200 40 days
• 8,000
• (73,000/365)

40 days
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Cash Management Managing Inventory/Supplies

• How much inventory/supplies do I need without
  losing sales or running out?
• Excessive inventory not only uses cash but
• Decreases profits
• Obsolescence
• Theft
• Opportunity costs

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Cash ManagementAccounts Payable

• Amounts you owe to your suppliers
• Free source of financing
• Managing the length of time helps to finance the
  accounts A/R and Inventory

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Cash ManagementManaging Accounts Payables

• Can I work with my suppliers to not be on C.O.D.?
• Can I stretch out the number of days that I owe
  my suppliers?

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Cash ManagementManaging Accounts Payables

• Days Payable Outstanding (DPO)
• Average Accounts Payable
• (Cost of Goods Sold/365)

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Cash ManagementManaging Accounts Payables

• Cost of Goods Sold 73,000
• Average accounts payable 6,000
• Daily sales 200
• 6,000
• (73,000/365)

30 days
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Cash Management

• Cash Conversion Cycle
• Consists of three components
• Days Sales Outstanding (DSO)
• Days Inventory Outstanding (DIO)
• Days Payables Outstanding (DPO)

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Cash Management

• Cash Conversion Cycle (CCC)
• DSO Average Accounts receivable
• (Sales / days in period)
• DPO Accounts Payable
• (Cost of Sales/ days in period)
• DIO Average Inventory
• (Cost of Sales/ days in period)

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Cash Management

• Example of CCC
• Calculate the second quarter of Pfizer and
  Warner-Lambert (numbers are in millions)

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Cash Management

• CCC Example Results

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Cash Management
BREAK
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Cash Management
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Cash Management

• How long can the company keep up with its bills,
  using only cash other liquid assets?
• Cash Marketable Securities A/R
• Average daily expenditures from operations

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Cash Management

• Methods to free up cash
• Tax savings
• Inventory methods
• LIFO v. FIFO
• Depreciation (Cost recovery methods)
• 179
• Double accelerated depreciation
• 1031 exchange
• 1202 stock sale of small business

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Cash Management

• Invest surplus cash
• Manage accounts receivable
• Target unpaid receivables
• Manage accounts payable
• Manage inventory
• Ask suppliers for a loan
• Manage debt
• Use credit cards
• Juggle bills
• Use alternative sources of financing

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Cash Management

• What is the quality of your earnings?
• Cash Receipts
• Sales
• Cash Flow from Operations
• Net Income

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Cash Management Growth

• Uses Cash
• Increase
• Inventory
• Administrative costs
• Payroll
• Marketing
• Insurance
• Taxes

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Cash Management Growth

• Profits may decrease
• Lower prices to attract more sales
• Special deals
• Contracts
• Buy more to get better costs and ROI
• Fixed costs increase
• Loosening up of credit terms
• Give away discounts

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Cash Management Growth

• Break Even point is constantly changing as fixed
  and variable costs change
• To keep employees may have to offer more benefits
• Profit sharing
• Dental, medical
• Employer taxes increase with increase in sales
• Workers compensation, FICA, Medicare, Etc.
• Insurance and risks increase with increase in
  sales

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Cash ManagementConclusion

• Find Cash
• Increase terms with suppliers
• Decrease credit terms with customers
• Smooth out timing of cash out with cash in

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Cash ManagementConclusion

• Understand what your cash needs are
• Develop relationships with your suppliers and
  your customers
• Do cash budgeting
• Do not give up cash for profits

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Thanks for your attention