Presented By: Jen Nord, CPA Rudd & Company, PLLC · PDF fileRudd & Company, PLLC Bozeman...
Transcript of Presented By: Jen Nord, CPA Rudd & Company, PLLC · PDF fileRudd & Company, PLLC Bozeman...
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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