Financial Management 101 from Fractal Labs

Finance. Made Simple.

Lunch and Learn – Financial Management 101 - March 31, 2016Fractal Labs LTD - Proprietary & Confidential

AGENDA.

Fractal Labs LTD - Proprietary & Confidential

.

1. Fractal Labs – the automated CFO

2. How revenue and costs become cash flows

3. Why operating working capital matters

4. How we can help

£

Intelligent automated financial assistant


PLATFORMS

Braintree, Shopify, + + +

BALANCE SHEETINCOME STATEMENT

CASH FLOW STATEMENT

HOW REVENUE AND COSTS BECOME CASH FLOW.


.

CASH 10REVENUE 100COST (90)

PROFIT 10 RETAINED EARNINGS 10

CUSTOMERS PAY DAY 1SUPPLIERS ARE PAID DAY 1

CASH AVAILABLE / (REQUIRED) DAY 1 to 30

PROFIT 10

CASH 10

1

For simplicity, we’re now only looking at operations, assuming no additional investments or financing.


CASH FLOW STATEMENT



.





PROFIT 10

CASH 10

1

If customers pay instantly and you pay suppliers instantly, revenue and costs translate directly into cash


CASH FLOW STATEMENT



.





PROFIT 10

CASH 10

1

If customers pay instantly and you pay suppliers instantly, revenue and costs translate directly into cash

100-90 = 10 and the BS balances.



.

INCOME STATEMENT BALANCE SHEET

CASH FLOW STATEMENT

ACC. RECEIVABLE 100

ACC. PAYABLE 90

CHANGE ACC. REC. (100)CHANGE ACC. PAY. 90




PROFIT 10

CASH 0CASH AVAILABLE / (REQUIRED) DAY 1 to 29

2

However, if you pay suppliers in 30 days and your customers pay you in 30 days, things look different



.


CASH FLOW STATEMENT

ACC. RECEIVABLE 100

ACC. PAYABLE 90





PROFIT 10


2

AR increases and AP increases.

Changes need to be accounted for in the CF since the actual cash received won’t be the same as the profit anymore.



.


CASH FLOW STATEMENT

ACC. RECEIVABLE 100

ACC. PAYABLE 90





PROFIT 10


2

Your profit is tied up in the business, or, your operating working capital requirement during this period is 10.

On day 30 you will get paid and suppliers need to get paid



.


CASH FLOW STATEMENT

ACC. RECEIVABLE 100

ACC. PAYABLE 90





PROFIT 10


2

AR will decrease by 100 as customers pay and AP will decrease by 90 when you pay suppliers.

Net cash flow for the full month (30 days) will be 10.


.



CASH FLOW STATEMENT

ACC. RECEIVABLE 100

ACC. PAYABLE 0


CASH (90)REVENUE 100COST (90)


PROFIT 10

CASH (90)CASH AVAILABLE / (REQUIRED) DAY 1 to 29

3


Imagine if you would need to pay your suppliers up front instead


.



CASH FLOW STATEMENT

ACC. RECEIVABLE 100

ACC. PAYABLE 0




PROFIT 10


3


On day 1 you would need to have enough cash to be able to pay suppliers 90


.



CASH FLOW STATEMENT

ACC. RECEIVABLE 100

ACC. PAYABLE 0




PROFIT 10


3


AR would be 100 and AP would be 0.


.



CASH FLOW STATEMENT

ACC. RECEIVABLE 100

ACC. PAYABLE 0




PROFIT 10


3


Operating Working Capital requirement would be 100.

More money will be tied up in the business

WHY OPERATING WORKING CAPITAL MATTERS.


.

BALANCE SHEET

ACC. RECEIVABLE 100

ACC. PAYABLE 90

CASH 0

RETAINED EARNINGS 10

OPERATING CURRENT ASSETS(Accounts Receivable, Inventory, Prepayments, Tax Assets)

LESSOPERATING CURRENT LIABILITIES

(Accounts Payable, Accruals, Deferred Income, Tax Liabilities)

BALANCE SHEET

CASH 10


BALANCE SHEET

ACC. RECEIVABLE 100

ACC. PAYABLE 0

CASH (90)


= 0 = 10 = 100

1 2 3

CASH FLOWS

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30



.

= 0 = 10 = 100

1 2 3

100

(90)

10

100

(90)

10

CASH FLOWS

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

100

(90)

10

CASH FLOWS

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

CASH FLOWS

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30



.

= 0

1

100

(90)

10

Example 1: If you receive all your income up front, and you pay suppliers immediately, your cash flow on day 1 = profit. OWC requirement is 0.



.

= 10

2

100

(90)

10

CASH FLOWS

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

Example 2: If you receive income in 30 days and pay suppliers in 30 days, your OWC requirement is 10 (you have to wait for your profit).



.

= 100

3

100

(90)

10

CASH FLOWS

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

Example 3: If you have to pay suppliers up front, but only receive income in 30 days, your cash flow on day one = your costs, and your CF day 30 = revenue. OWC is 100, as you need to pay 90 to suppliers and wait for your profit of 10.



.

= 100

3

100

(90)

10

CASH FLOWS

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

Example 3: If you have to pay suppliers up front, but only receive income in 30 days, your cash flow on day one = your costs, and your CF day 30 = revenue. OWC is 100, as you need to pay 90 to suppliers and wait for your profit of 10.

For the full month, the net cash flow is the same (the profit), but the timing of your cash out flows and inflows are very different. This brings us to the importance of the Cash Conversion Cycle.

WHY CASH CONVERSION CYCLE MATTERS.


.

100

(90)

10

= 0 days = 0 days = 30 days

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

1 2 3

CASH FLOWS

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

100

(90)

10

CASH FLOWS

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

100

(90)

10

CASH FLOWS

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

WHY CASH CONVERSION CYCLE MATTERS.


.

100

(90)

10

= 0 days = 0 days = 30 days

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

1 2 3

CASH FLOWS

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

100

(90)

10

CASH FLOWS

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

100

(90)

10

CASH FLOWS

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

How many days it takes to convert your profit into cash from the moment you pay your first cost.Defined as Days Receivables – Days Payables

100

(90)

10

CASH FLOWS

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30



.

3

INCREASING DAYS PAYABLE:

CUSTOMERS PAY DAY 30SUPPLIERS ARE PAID DAY 20 100

(90)

10

CASH FLOWS

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

MINIMUM CASH

To reduce this conversion time, Days Rec can be reduced or Days Pay increased.

100

(90)

10

CASH FLOWS

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30



.

= 10 days

3



(90)

10

CASH FLOWS

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

MINIMUM CASH


If Days Pay are increased to 20, CCC will be 10. (30 – 20).

100

(90)

10

CASH FLOWS

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30



.

= 10 days

3



(90)

10

CASH FLOWS

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

MINIMUM CASH


If Days Pay are increased to 20, CCC will be 10. (30 – 20).

The suppliers will need to get paid in day 20, which reduces the average amount of working capital needed for the month.

100

(90)

10

CASH FLOWS

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30



.

= 10 days

3INCREASING DAYS PAYABLE:


AVERAGE OPERATING WORKING CAPITAL:

AVERAGE ACCOUNTS RECEIVABLE = 100LESS

AVERAGE ACCOUNTS PAYABLE = 90*(20/30)=60

= 40

100

(90)

10

CASH FLOWS

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

MINIMUM CASH

100

(90)

10

CASH FLOWS

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30



.

= 10 days

3INCREASING DAYS PAYABLE:


AVERAGE OPERATING WORKING CAPITAL:

AVERAGE ACCOUNTS RECEIVABLE = 100LESS

AVERAGE ACCOUNTS PAYABLE = 90*(20/30)=60

= 40

100

(90)

10

CASH FLOWS

2 4 6 8 10 12 14 16 18 20 22 24 26 28 30

100

80

60

40

20

0

(20)

(40)

(60)

(80)

(100)

MINIMUM CASH

the minimum cash balance on day 20 will need to be 90 in order for the business to survive.

HOW CAN WE HELP?


.

AUTOMATED ALERTS

BUDGET vs ACTUALS

CASH ANALYSIS

REPORTS

THANK YOU

Lunch and Learn – Financial Management 101 – March 31, 2016Fractal Labs LTD - Proprietary & Confidential

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Financial Management 101 from Fractal Labs