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TIPS TO CREATING A

HEALTHY CASH FLOWPresented By:Jen Nord, CPA

Rudd & Company, PLLCBozeman MTBozeman, 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

CASH

Revenues when cash

Expenses when incurred

Capitalize fixed assets

Recognize only interest on debt as expense

received

Expenses when paid

Record all assets as deduction

Recognize full debt payment as deductions

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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.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

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TYPES OF CASH FLOWS

Operating Activities

Cash in from sales to customers 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 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

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CASH FLOW CRUNCH

Warning signs

Aging receivables 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

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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

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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 possibleg p

Lease vs. Buying

Travel and credit card rewards

Monitor energy usage

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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

t i di id l i lif t d t tmost individuals, 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

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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

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LIQUIDITY RATIOS

Current Ratio

= Current assets/Current= 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)( y)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 inventoryg y

(COGS / day)

Measures the number of days inventory stays in the system

Inventory is Frozen Cash

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EFFICIENCY RATIOS

Inventory Turnover

= 360 days/Days sales in inventory= 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

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EFFICIENCY RATIOS

Cash Conversion Cycle

= DSI + DSO – DPO 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

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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

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BUDGET ANALYSIS

Budget Month to Month

Monthly Budget to Actual

Year-to-Date Budget to Actual

Jen Nord, CPA

Rudd & Company, PLLC3805 Valley Commons Dr. Ste. 7

Bozeman, MT 59718

Tel: (406) 585-3393Fax: (406) 585-7132Fax: (406) 585 7132www.ruddco.com

jnord@ruddco.com