Cash-flow basics - WordPress.com
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Entrepreneurship & Innovation 2013 Innovation – financial basis Cash-flow basics © Robert Jones 2001-2013 Robert Jones Ashcroft International Business School Anglia Ruskin University [email protected]
Transcript of Cash-flow basics - WordPress.com
Entrepreneurship & Innovation 2013
Innovation – financial basis
Cash-flow basics © Robert Jones 2001-2013
Robert Jones Ashcroft International Business School Anglia Ruskin University
Objective
To understand the importance of
Cash-flow management
The 4 Fs of start-up finance
Founder’s funds – most common source Family Friends Foolish investors:
Business partners Bank loan – not for hi-tech Bank overdraft Government grants ? Venture capital?
Bank’s checklist:- What is the Bank Manager* looking for? *(“Business banking relationship manager”!) C haracter of borrower and business A bility to borrow and repay M argin of profit P urpose of the loan A mount of the loan R epayment terms I nsurance (security of payment)
Banks’ attitude to small business in UK:- Pre 1980 not interested in small business 1980s enthusiastic, even foolish, lending, incentives late 1980s recession and bad debt, clamp down on SMEs (banks “killed off” many SMEs by drawing in loans) 1990s - more “business-like”, a business plan is required, incentives for new SMEs, e.g.free banking for 18 months 2000 - dot.coms became dot.bombs (no business plans!!) so now a business plan is more important than ever.
Banks’ attitude to small business in UK:-
Now banks often reject the first business plan and insist that you revise and improve your plan.
A cash flow spreadsheet forecast is essential, with realistic & pessimistic scenarios.
Typically banks look for a quick (2 – 3 year) payback
UK Govt’s Competition Commission report:- “The supply of banking services by clearing banks to small and medium-sized enterprises...” http://www.competition-commission.org.uk/rep_pub/reports/2002/462banks.htm#summary 11nov2003 “A number of specific practices restrict and/or distort price competition” e.g. excessive charges, excessive profits, obstacles to changing accounts
(Followed an enquiry into SME banking by Cruickshank)
“Banks Clean Up Their Act” 31 October, 2002 http://news.bbc.co.uk/1/hi/business/2381919.stm
Eight of the UK's main banks have agreed to change the way they treat small business customers.
The banks concerned have agreed to the so-called behavioural remedies recommended by the Competition Commission. The proposals cover measures to make it easier to switch banks and to increase the transparency of bank charges.
EU Code of Conduct between credit institutions and SMEs A non-legislative initiative by the EC aiming to improve working relations between banks and SMEs
http://europa.eu.int/abc/doc/off/bull/en/200112/p103094.htm
BASEL II Regulatory changes have introduced capital adequacy requirements more linked to the risk of borrowers.
BASEL II (2004) Introduced capital adequacy requirements more linked to the risk of borrowers.
Clients / Customers Suppliers
Cash-flow Cycle
Costs Sales (includes profit margin) Cash
Work in Progress
Cash-flow basics
Euros Euros
Euros Euros
Creditors Debtors
Customers Suppliers
Cash-flow Cycle
Costs Sales Cash
Work in Progress
Grants Bank loan
Overdraft
Sources of cash
Raw materials or services
Products or services
Customers Suppliers
Cash-flow Cycle
Costs Sales Cash
Work in Progress
Rent, rates Equipment, assets Utilities, Loan repayments
Fixed costs and indirect costs - before you start
Customers Suppliers
Cash-flow Cycle
Costs Sales Cash
Work in Progress
Rent, rates Equipment, assets Utilities, Loan repayments
Cash purchases
Direct costs
At first, suppliers will probably demand cash payment before you have a track record with them. You now have direct costs for work-in-progress
Customers Suppliers
Cash-flow Cycle
Costs Sales Cash
Work in Progress
Rent, rates Equipment, assets Utilities, Loan repayments
Cash purchases
Direct costs Invoice sales
Customers ask to be “invoiced” - delay payment by 30 days or 60 days or more (typically 40-45 days in UK). What is your cash position?
Customers Suppliers
Cash-flow Cycle
Costs Sales
Work in Progress
Rent, rates Equipment, assets Utilities, Loan repayments
Cash purchases
Direct costs Invoice sales
Making good “sales”, business is growing BUT where is the cash inflow? Cash pile disappears.
Customers Suppliers
Cash-flow Cycle
Costs Sales
Work in Progress
Rent, rates Equipment, assets Utilities, Loan repayments
Cash purchases
Direct costs Invoice sales
CASH-FLOW CRISIS! Typical reaction is to extend overdraft. Is this sensible?
Overdraft
Customers Suppliers
Cash-flow Cycle
Costs Sales
Work in Progress
Rent, rates Equipment, assets Utilities, Loan repayments
Cash purchases
Direct costs Invoice sales
2 or 3 months later, payments are received. But, are you able to finance “late payment”?
Cash
Customers Suppliers
Cash-flow Cycle
Costs Sales
Work in Progress
Rent, rates Equipment, assets Utilities, Loan repayments
Cash purchases
Direct costs Invoice sales
Suppliers may now allow payment on a 30 day account - this eases the cash-flow
Account purchases
Cash
Customers Suppliers
Cash-flow Cycle
Costs Sales
Work in Progress
Rent, rates Equipment, assets Utilities, Loan repayments
Cash purchases
Direct costs Invoice sales
Cash sales are highly desirable. Perhaps offer discount for prompt payment. Reduces profit BUT eases cash-flow,
Account purchases
Cash
Cash Sales
Customers Suppliers
Cash-flow Cycle
Costs Sales
Work in Progress
Rent, rates Equipment, assets Utilities, Loan repayments
Cash purchases
Direct costs Invoice sales
Credit card machine - you receive payment within 5 days. BUT VISA charges 4% on transaction + monthly rental. Reduces profit BUT eases cash-flow.
Account purchases
Cash
Credit card sales
Customers Suppliers
Cash-flow Cycle
Costs Sales
Work in Progress
Rent, rates Equipment, assets Utilities, Loan repayments
Cash purchases
Direct costs Invoice sales
Credit card purchases. A business account must be paid in full each month. Eases cash-flow.
Cash
Credit card sales
Credit card purchases
Customers Suppliers
Cash-flow Cycle
Costs Sales
Work in Progress
Rent, rates Equipment, assets Utilities, Loan repayments
Cash purchases
Direct costs
Invoice factoring - factor “buys” your invoices, Pays you 80% now, pays further 15% when customer pays factor. Reduces profit BUT eases cash-flow
Cash
Credit card sales
Credit card purchases
Invoice factoring
80% payment now
15% balance later
Cash-flow forecast – the heart of the business plan
Remember:-
Cash is king
Cash is different to profit
Monitor your cash position often
Timing of payments is key
Keep your customers happy
Keep your suppliers paid
A love of money is the root of all evil
But ….. Money is the root of all evil
Entrepreneurship & Innovation 2013
Innovation – financial basis
Cash-flow basics © Robert Jones 2001-2013
Robert Jones Ashcroft International Business School Anglia Ruskin University
