BANBRIDGE DISTRICT ENTERPRISES
How to make a Successful Business Even more
Successful
Practical Working Capital Management and
Managing Your Cash Flow
Feargal McCormack
28 February 2006
www.fpmca.com
E-mail: f.mccormack@fpmca.com
Telephone: 028 302 61010
Programme Outputs
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Enhanced Understanding of Finance
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Interpretation of Financial Statements
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An understanding of the concept of cash flow and how to develop a cash flow forecast
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Why, for businesses, CASH and not PROFIT, is king
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Why tracking and managing cash flow is critical to business survival
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Why cash flow forecasting is an important strategy
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Vital warning signs
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Sales and Cash receipts monitoring
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Working illustration
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Strategies to improve your cash flow situation
Interpretation of Financial Statements
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Profit & Loss Account
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Balance Sheet
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Cashflow Statement
Statutory Profit & Loss Account
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Sales
Cost of Sales
Gross Profit
Other Income
Overheads:
Administration
Distribution
Establishment
Financial
Profit Before Interest & Tax
Net Profit
Exceptional Items
Dividends
Management Profit & Loss Account
 Sales
 Variable Costs
 Contribution to fixed overheads
 Fixed overheads
 Net profit
 Breakeven point
 Margin of safety
 Importance of profitability to generate cashflow
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Balance Sheet
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Fixed Assets
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Current Assets
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Current Liabilities
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Long Term Liabilities
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Provision for Liabilities and Charges
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Share Capital and Reserves
Fixed Assets
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Tangible Fixed Assets
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Intangible Fixed Assets
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Investments
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Depreciation
Current Assets
 Assets held for a short period of time.
 Assets that will be converted to cash within one year.
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Examples of Current Assets
 Trade Debtors:- amounts owned by customers
 Prepaid Expenses:- expenses paid in advance e.g.
insurance, rent, rates
 Stocks:- products held for sale or to be used in the
manufacturing process
 Work-in-progress
 Bank and Cash Balances
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Current Liabilities
 Short-term Obligations
 Debts to outside parties due within one year
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Examples of Current Liabilities
 Trade Creditors:- money owed to suppliers generally
will be paid in accordance with credit terms
 Taxes:- PAYE, VAT and Corporation Tax
 Bank Overdraft
 Bank / Directors Loans
 Lease / HP Creditors
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Cash Flow - Lifeblood Of Your Business
 While a business can survive for a short time without
sales or profits, without cash it will die, so ready cash
is the primary indicator of business health
 For this reason the inflow and outflow of cash needs
careful monitoring and management
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What Is Cash Flow?
 The three components of cash flow:
– Funds on hand at the beginning of any period
– Funds received and spent during an ensuing period
– And the funds remaining at the end of that period
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Freeing Up Profits
“Are you Sure I Made a Profit”?
I have less money now than
at the start of the year
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Cash Is NOT Profit
 Profit is the difference between the total amount your
business earns and all of its costs, usually assessed
over a year or other trading period
 Cash is the amount you have on hand to pay debts
 You can be showing a good profit on the books and
still be strapped for cash to cover immediate debt
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Cash Is King
 It’s available cash that is needed to sustain a business from
day-to-day
 Cash is king
• Cash is the life-blood of any business
• Business Managers have to keep it flowing
• Cash Flow forecasts are a pre-requisite for business success
• Self discipline and good management will yield positive
results by improving profitability and reducing risks
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What’s Measured In Cash Flow?
Cash
Not Cash
Coins and notes
Long term deposits
Current accounts and short
term deposits
Long term borrowing
Money owed by customers
Bank overdrafts and short
term loans
Foreign currency and
deposits that can be quickly
converted to your currency
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Stock
Freeing Up Profits
Company A
P&L
Paid
Debtors
60,000
10,000
Sales
100,000
40,000
Bank
CoS
80,000
30,000
Creditors
Profit
20,000
(50,000)
Net assets
20,000
Debtors
80,000
Company B
P&L
Paid
Sales
100,000
20,000
Bank
(30,000)
CoS
80,000
50,000
Creditors
(30,000)
Profit
20,000
Net assets
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20,000
The Cash Flow Cycle
Borrowing Capacity /
Shareholder Input
Accounts
Receivable
CASH
FLOW
RESERVOIR
Operating
Expenses
Dividends
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Inventory &
Manufacturing
Expenses
Tax
Plant &
Equipment
Interest
Goods
Sold
Cash Inflows And Cash Outflows
 Income and expenditure cash flows rarely coincide
BUT you must always be in a position to meet your
scheduled payments
 This means there can be times when you could simply
NOT have enough ready cash to meet your
commitments
 Cash flow management is basically about speeding up
the inflows and slowing down the outflows
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Key Requirements Of Your Cash
Flow
 Cash flow should have three characteristics; it should
be:
– Positive
– Available
– Timely
 To achieve this requires planning
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Cash Flow Forecasting
 Cash flow forecasting enables you to plan for:
– How much cash your business will need to keep trading
– When it will be needed
– Applying for financing if there is going to be a shortfall
– Managing excess funds
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Elements Of A Cash Flow Forecast
 Receipts
 Payments
 Excess of receipts over payments - with negative
figures shown in brackets
 Opening bank balance
 Closing bank balance
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Using The Forecast
 A cash flow forecast will assist you to structure
your business’ policies for working capital
management to meet your cash needs, or work
with your accountant to apply for financing
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Improving Cash Flow
 To improve cash flow you need to work on the drivers
of cash flow:
– Receivables
– Suppliers
– Inventory
– Assets
– Costs
– Trading pattern
– Trading volume
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Debtors Management Control
REDUCING DEBTOR DAYS
Companies can accelerate monies due from debtors by following a
few Simple steps:
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Review debtors list and establish baseline position
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Agree Terms of Business including payment terms in advance
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Establish credit practices as a matter of company policy
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Establish limits for each category of customer - never allow
exposure to slip beyond these limits
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Constantly review the limits when times are tough or to
customers in weak industries
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Agree up front payments or payments on completion of
milestones
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Assign person with responsibility for the collection of debtors
Debtors Management Control
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Use credit agencies and bank references before you actually engage in
business with potential new customers;
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Secure guarantees for large credit limits;
Consider charging interest on overdue accounts;
Consider accepting credit cards or smart cards as a payment option;
Sales credit insurance to be considered;
Option of invoice discounting to be considered;
Set up direct debits / standing orders for regular customers;
Consider offering discounts for early payment of invoices;
Consider factoring debtors;
Example decrease debtor days; and
STOP further sales on overdue accounts.
Debtors Management Control
TELLTALE
If your average age of your debtors is worse as the point of
review that it has been for some time you may need to look at
some of the following telltale signs:
 Weak credit judgement
 Poor collection procedure
 Not enforcing
 Slow issue of statements
 Customer dissatisfaction
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Debtors Management Control
POTENTIAL BAD DEBT INDICATORS
Some of the key indicators about a potential bad debt problem include:
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Longer credit terms taken without approval followed by smaller
orders
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The issue of post-dated cheques by debtors who normally settle
within terms
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Evidence of regular switching to different suppliers for the same
goods
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New customers who are reluctant to give credit references
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Receiving round sum payments from debtors
Creditors Management Control
 Who authorises purchasing in your company?
managed or spread among a number of people
Is it tightly
 Is there a formal purchase order system in place
 Do you know the cost to the company of carrying stock?
 Do you have alternative sources of supply?
If not, get
quotes from major suppliers and shop around for the best
discounts?
 How may suppliers have a return policy?
 Are you in a position to pass on cost increases quickly with
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price increases to your own customers?
Creditors Management Control
 If a supplier of goods or services lets you down can
you charge back the cost of the delay?
 Can you arrange to have delivery of supplies
staggered?
 Possibility of consignment stock terms
 Consider Reservation of Title
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Stock Management
The principal factors that need to be considered in
determining the Optimum stock level include:
 Projected sales levels
 Availability of raw materials/stock
 Lead time required by suppliers
 Length of production process
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 Efficiency of distribution
Stock Control Procedures
For better stock control measurements try the following:
 Carry out physical stocktakes on at least a six monthly
basis
 Know the number of times each major item of your stock
turns in a year
 Consider selling off outdated or slow moving
merchandise, it will only get more difficult to sell if you
keep it
 Analysis stock by product – 80% of profit is generated by
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20% of products
Stock Control Procedures
 Consider having part of your product out-sourced to
some other manufacturer rather than make it yourself
low profit items – opportunity lost?
 Review your security requirements to ensure no stock
is going out the back door
 Review production process and eliminate bottlenecks
which delay delivery
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Strategy: Manage Assets
 As a general rule, you should try to finance your
operations out of working capital
 If your business needs to purchase an expensive
machine or other fixed asset, match repayment period
to the expected lifetime of the equipment
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Strategy: Manage Costs
 In 99% of cases, there are some (sometimes
significant) savings to be made that will improve
the cash flow situation
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Strategy: Manage Trading Pattern
 Uneven income distribution due to seasonal demand
or whatever, can lead to peaks and troughs in the cash
flow
 Try to even out the income flow through:
– Market to sell more in the ‘trough’ periods
– Encourage non-urgent customers to wait for goods and services
until a slower time of year
– Vary pricing to encourage demand
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Cashflow Planning
If cash flow shows an additional requirement beyond original
expectations, consider the following:
 In short term encourage payment of debtors (focus on cash
collection or cash discounts etc)
 Negotiate additional credit from suppliers
 Reduce level of raw materials or finished goods and sell off
obsolete stock
 Talk to your local bank in advance about additional credit
accommodation to maintain credibility
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Cashflow Planning
 Seek additional support from shareholders
 Reduce, defer or even consider cancelling drawings,
dividends or other payments to shareholders or
proprietors
 Increase your trade credit by agreement to support
additional sales
 Consider debtor factoring
 Consider outside equity or a business angel
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Cashflow Planning
Conversely, if you expect to generate surplus cash, consider:
 Making more regular lodgements to your overdraft
(reducing interest bill)
 Seeking better discount for early or cash payments to
suppliers
 Examining short term investment opportunities
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Strategy: Manage Trading
 Overtrading can result in major cash flow
problems
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Borrowing As A Strategy
 Two common ways in which many businesses get
over a cash flow crisis
– Borrow
– Put more of the shareholder’s money into the business.
 These are acceptable for coping with short term
constrictions, or to fund growth in line with your
business plan, but shouldn't form the basis of your
cash strategy
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Measuring Your Performance
 If you work on your drivers you need also to monitor
those drivers on a regular basis to see how you are
going – if you are achieving what you planned for
 There is always the opportunity to be better.
If you’re
not monitoring your actual results regularly, you can’t
capitalise on any opportunities that improved cash
flow might offer.
 What you can measure, you can manage
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Vital Warning Signs
Since you cannot measure everything all of the time, pick out the “vital
signs” that are relevant to your business and plot them over a period. If
there is a sudden change in a trend look for the root cause and take
immediate corrective action before it is too late.
Examples of vital signs would be:
 Pre-tax profits as a percentage of sales
 Gross profit margin
 Bad debts (number and amount)
 Debtor Profile
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 Stock Turnover
Vital Warning Signs
 Goods returned
 Complaints from customers
 Staff turnover
 Absenteeism
 Downtime
 Accidents in the work place
 Business Quoted/lost/won
 Level of bank debt
 Level of repeat business
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Cash Flow Key Performance Indicators
 There are a number of key performance indicators
(KPIs) that will indicate, on their own or in
association with other KPIs, how the business is
performing with regard to the drivers of cash flow e.g.
– Inventory turnover
– Days receivable
– Days payable
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Steps To Developing And Monitoring
Your KPI’s
 Determine what needs to be monitored in your
business (your KPIs)
 Input actuals and compare them to your plan, either
monthly or some other period
 Identify where they vary from the plan
 Take corrective action as needed
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Monthly Sales and Cash Receipts
Monitoring Y/E 30/04/04
CASH COLLECTED
(Net of VAT)
NET FEES ISSUES
Budget
May 2005
Cumulative
June 2005
Cumulative
July 2005
Cumulative
August 2005
Cumulative
Sept. 2005
Cumulative
Oct. 2005
Cumulative
Nov. 2005
Cumulative
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Actual
30/4/06
P/Y y/e
30/4/05
Budget
Actual
30/4/06
P/Y y/e
30/4/05
Monthly Fees Control
Client
Total
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Budgeted
Actual
Variance
Comment
Monthly Cash Receipts Control
Client
Total
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Budgeted
Actual
Variance
Comment
Summary
 More businesses fail because of poor cash flow than
because of poor profit
 Cash flow should be planned and managed
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Conclusion
FPM – A Client Focused Practice
www.fpmca.com
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