Cash Conversion, Working Capital and Cash flow levers. Steve Ferguson CFO Particeps

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Clinton Beasley
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1 Cash Cversi, Wrkig Capital ad Cash flw levers Steve Fergus CFO Particeps

2 Wh is CFO Particeps? Itrducti Ctract CFO services primary targeted at small-t-medium size cmpaies Part-time/Iterim/Prject wrk 5 parters i Bay Area & N. Nevada Icubatr ivlvemet with KIC & StartUpNV Steve@cfparticeps.cm 2

3 Framewrk fr the ext hur Discussi uderstadig & maagig Cash flws & Wrkig Capital Ifrmal frmat: If yu have a questi ask it Please brig up persal experieces that add clr Participati ad egagemet are ecuraged Audiece assessmet: Start-up busiess wers pre-fudig & pre-reveue? Busiess wers with reveue? Prfitable? Peple are here t etwrk ad perhaps lear smethig abut busiess???? Sice this is Wrkshp I figured I d add a quiz at the edj 3

4 Overview Cash & Wrkig Capital Cash Cversi Cycle Applies t cmpaies that carry ivetry IE Retailers, maufactures Wrkig Capital Applies t all cmpaies Chages vertime mre imprtat tha amut Cash Flw frm Operatig Actives Tp & mst imprtat secti f Statemet f Cash Flws 4

5 Cash Cversi Cycle (CCC) A measure f hw lg cash is tied up i wrkig capital Measures efficiecy f a cmpay maagig ivetry, cllectis, ad payables t geerate cash flw CCC = Days Ivetry Outstadig + Days Sales Outstadig Days Payables Outstadig Ivetry Cllectis Payables 5

6 Wrkig Capital Defied A smetimes ebulus term with slightly varyig defiitis Amut will vary sigificatly by idustry & cmpay Accutig defiiti Wrkig Capital = Curret Assets Curret Liabilities Maagemet r Valuati (DCF) defiiti Net (cash) value required t fud peratis Curret Assets excl Cash Curret Liabilities excl shrt term debt Cash & Debt are t really peratig items Cash is a utput & Debt is fiacig What really matters is the Chage i this Value Negative # meas A > L (mre cash tied up; Cash flw decreases) Psitive # meas A < L (less cash tied up; Cash flw icreases) Is the cmpay gettig mre/less efficiet? 6

7 Wrkig Capital Illustrated Operatig Capital Assets Accuts Receivable Ivetry Prepaid Exps & ST assets Accuts Payable Deferred Reveue Other ST Accruals Liabilities Cash Wrkig Capital ST Debt 7

8 Cash Flw frm Operatig Activities (CFOA) CFOA = Net Icme + N-Cash Expeses +/- Chages i Wrkig Capital N-cash expeses iclude depreciati, amrtizati & tax accruals Why is it imprtat? It fuds the cmpay ad it s ability t grw The tp secti f ay Statemet f Cash Flws A simple illustrati f CFOA 8

9 Levers fr Optimizig Cash Cversi Days ivetry utstadig Prudet ivetry maagemet Miimize ivetry had vs miimize ut f stck (fie lie) Reliable supply chai Rbust ivetry maagemet system Prcedures keep them simple & repeatable Structure icetives ad recgiti arud ptimizig DIO Days sales utstadig Negtiate favrable paymet terms with custmers Esure smee is fcused cllectis ad prvide icetives ad recgiti fr achievig perfrmace metrics Takig credit card paymets - immediate paymet vs Net 30 I a cruch factrig (sellig) receivables shuld be csidered Ivice Daily! Days payables utstadig Negtiate favrable paymet terms with suppliers D Nt pay bills early ; but pay them -time Csider usig a Purchasig (credit) card 9

10 Suggestis fr CFOA Optimizati Avid prepayig fr aythig uless it s required r at a sigificat discut (eve a icremet reducti helps) Icrease deferred reveue & ther liabilities where pssible Factr receivables i whe i a bid Other thigs f te: Cmpaies with icreasig CFOA vertime are imprvig the fiacial health f the cmpay It des t happe it s w yu ca bet they are maagig cash cversi ad wrkig capital I my pii it s a istrumetal metric ad smetimes eve mre imprtat tha EBITDA r Net Icme 10

11 Other Cash Flw levers Sales icreases Fiacig Debt (LOC) & Leasig Accelerated Depreciati & Amrtizati Will lwer yur taxes Sell uder used Assets & sublease space Lwer yur cst f Admiistrati & Cst f Gd Sld Imprved prductivity with sftware ad peratial imprvemets Have smee fcused Supply Chai pricig ad cstraits Autmati 11

12 Quiz Time Questi #1 True r False: I rder t Miimize Cash Cversi Cycle, amg ther thigs, yu shuld reduce yur ivetries as much as pssible? False Ivetry maagemet is a balacig act ad eed csider may factrs icludig sales frecasts, actual sales rates, ut-f-stck, rerder times, ad reliability f the supply chai 12

13 Questi 2: The ccept f Wrkig Capital takes it accut which f the fllwig metrics? A. Chages i Ivetry B. Chages i Accuts Payable C. Chages i Accuts Receivable D. Chages i Deferred Reveue E. Chages i Pre-Paid Expeses F. All f the abve 13

14 Questi 3: True r False: Whe calculatig Cash Flw frm Operatis, a large icrease accuts receivable will have a ufavrable impact CFOA? True Icreasig chage i accuts receivable will ufavrably impact Cash Flw frm Operatig Activities 14

15 Questi 4: If a cmpay has 3 csecutive years where the Net Chage i Wrkig Capital is Negative it s: A. Fiacial health is imprvig B. Fiacial health is dimesiig C. Curret assets are grwig faster tha it s curret liabilities D. A & C E. B & C F. Ne f the abve 15

16 Questi 5: I 2017, Cmpay A s et icme grew by 5% while Cmpay B s et icme decreased by 5%: Which cmpay had a icrease i CFOA? A. Cmpay A B. Cmpay B C. Ca t be determied - Nt eugh ifrmati is prvided D. Neither cmpay 16

17 Bus Questi: True r False: Whe Su Valley Resrt pes the imprved Cld Sprigs area Baldy, Sawtth Brewery will have icrease it s ivetry f Cld Sprigs Pilser ad thus icrease it s wrkig capital? T be determied;-) 17

18 QUESTIONS

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