TIPS TO CREATING A HEALTHY CASH FLOW Presented By: Jen Nord, CPA Rudd & Company, PLLC Bozeman, MT May 23, 2013 OUTLINE FOR THIS SESSION Cash Flow Statements vs. Income Statements Cash flow crunches & where to find additional cash inside your business Ratios to measure financial health Budgeting PROFIT VS. CASH PROFIT Revenues when earned Expenses when incurred Capitalize fixed assets Recognize only interest on debt as expense CASH Revenues when cash received Expenses when paid Record all assets as deduction Recognize full debt payment as deductions 1
COMPANIES NEED BOTH CASH AND PROFITS If a company is profitable, but short on cash, it needs financial expertise to make good decisions about timing. If a company has cash, but is unprofitable, it needs operational expertise to generate additional revenues while lowering costs. THE INS AND OUTS OF CASH FLOWS STATEMENT OF CASH FLOWS Over a period of time Reports the Ins and the Outs Start with net income (income statement) Add back non-cash items Report the changes in balance sheet accounts End with change in cash 2
TYPES OF CASH FLOWS Operating Activities Cash in from sales to customers Cash out for inventory, accounts payable Any items that relate directly to operations TYPES OF CASH FLOWS Investing Activities Purchase of fixed assets Financing Activities Borrowing and repayments of loans Equity investments from owners PLUG THE LEAKS Understand the peaks and valleys Pay attention to capital expenditures Watch for warning signs 3
CASH FLOW CRUNCH Warning signs Aging receivables Debt problems Late financial reports Late interest charges PLACES TO LOOK INTERNALLY Accounts Receivable Inventory Accounts Payable Overall expenses ACCOUNTS RECEIVABLE Raise prices Bill timely Reduce float Accept credit cards 4
ACCOUNTS RECEIVABLE Offer discounts Retainers Be selective about extending credit Collect outstanding receivables Cut off the juice Suggest a payment plan INVENTORY Just in time supply purchases Sell obsolete inventory Expedite fulfillment and shipping 5
ACCOUNTS PAYABLE Early payment discounts Stretch out payables Use electronic fund transfers Prioritize cash disbursements Contact vendors to negotiate terms Plan for cash flow realities Stay involved OVERALL EXPENSES Comparison-shop for everything Negotiate whenever possible Lease vs. Buying Travel and credit card rewards Monitor energy usage 6
OVERALL EXPENSES Postage and mailings Insurance Office supplies Cell phones SURVIVING SHORTFALLS Become aware of the problem as early as possible No from banks? Turn to suppliers Take inventory of your assets Choose the bills you pay carefully BUFFETOLOGY One of the things you will find which is interesting and people don t think of it enough with most businesses and with most individuals, id is life tends to snap you at your weakest link. The two biggest weak links in my experience: I ve seen more people fail because of liquor and leverage leverage being borrowed money. - Warren Buffet 7
OTHER AREAS Refinance debt Leasing vs. buying Earn interest on excess cash Contact your good customers Get the company on board THE POWER OF RATIOS 8
LIQUIDITY RATIOS Current Ratio = Current assets/current liabilities Measures a company s ability to pay its bills A ratio < 1.0 is trouble LIQUIDITY RATIOS Quick Ratio = (Current assets Inventory) Current liabilities Measures a company s ability to pay its bills without having to wait to sell inventory Lenders and vendors will be expecting this to be above 1.0 again EFFICIENCY RATIOS Days Sales in Inventory DSI = Average inventory (COGS / day) Measures the number of days inventory stays in the system Inventory is Frozen Cash 9
EFFICIENCY RATIOS Inventory Turnover = 360 days/days sales in inventory (DSI) Measures how efficiently a company uses its inventory Good metric to benchmark against peers EFFICIENCY RATIOS Days Sales Outstanding ( DSO ) = Ending accounts receivable/ (Revenue/day) Also known as average collection period or receivable days Measures the average time it takes to collect cash from sales. EFFICIENCY RATIOS Days Payable Outstanding ( DPO ) = Ending accounts payable / (COGS/day) Measures the average number of days it takes a company to pay its bills Important to strike a balance between preserving cash and keeping vendors happy 10
EFFICIENCY RATIOS Cash Conversion Cycle = DSI + DSO DPO Measures how much cash ( working capital ) is required to finance your operations Working capital requirement = No. of days in cash conversion cycle x Sales per day A budget tells us what we can t afford, but it doesn t keep us from buying it. - William Feather A budget is just a method of worrying before you spend money, as well as afterward. - Unknown It s clearly a budget. It s got a lot of numbers in it. George W. Bush BUDGETING 11
BUDGETING Create a REALISTIC budget Base items on previous year and adjust Start with fixed recurring costs Fill in revenues, then inventory purchases needed to fill orders or payroll costs needed to service clients Plan for the tight months Monitor budget to actual at least monthly SAMPLE BUDGET (in your packets) BUDGET ASSUMPTIONS Increase cash sales by 25% Increase credit sales by 30% New Loan in June for equipment (50% of cost, results in increase in loan payments) Cost of Goods Sold increase by 15% Increase owner withdrawals to $1,000 per month 12
BUDGET ANALYSIS Budget Month to Month Monthly Budget to Actual Year-to-Date Budget to Actual Jen Nord, CPA Rudd & Company, PLLC 3805 Valley Commons Dr. Ste. 7 Bozeman, MT 59718 Tel: (406) 585-3393 Fax: (406) 585-7132 www.ruddco.com jnord@ruddco.com 13