Cash Management

Neil Shnider, RPh, MBA, CPA

Neil Shnider 2004

Cash Management
GM now running leaner, faster
Detroit New (Nov 1997)

Management is driven completely by the amount of cash that goes into this business and the amount of cash that goes out, said John Cassesa. For the longest time, the management of GM didnt understand that.
John Casesa, auto analyst for Schroder & Co. in New York
Neil Shnider 2004 2

Cash Management
General Electric recently announced that CEO Jeffrey Immelt will receive a new form of compensation tied to performance targets achieved over five years.
PSU (Performance stock units)
Half of the PSUs convert into GE stock only if GE achieves 10% percent average annual growth in net cash from operating activities over the period Half is converted only if total shareholder return meets or beats the S&P 500
Columbus Dispatch October 19, 2003

Neil Shnider 2004

Profit is not cash

Profit is an accountants abstraction

Neil Shnider 2004

Profit v. Cash
Profit is Revenue - Expenses Cash is Receipts - Disbursements

Neil Shnider 2004

Cash Management
Scenario
Beginning cash is $20,000 Buy $10,000 inventory on account for 30 days with 2n30 Sells inventory that cost $2,000 for $6,000 on account Records $200 of equipment depreciation Pays labor cost and administrative staff for the month $2,000 Pays rent and utility bills or $800 Pays vendors $9,800 for inventory purchased

Neil Shnider 2004

Cash Management
Income Statement
Revenue Expenses
Financial Statements

Balance Sheet (Statement of Financial Position)

Assets Liabilities Owners Equity
Neil Shnider 2004 7

Cash Management
Financial Statements

Statement of Cash Flow

Three Parts
Cash flow from operations Cash flow from investments Cash flow from financing

How did I use of my cash?

8

Neil Shnider 2004

Cash Management
Income Statement

Sales Less COGS Net Profit Less operating expenses depreciation Less depreciation Net Income

$6,000 (2,000)
$4.000

(2,800)

(200)

(3,000) $1,000
9

Neil Shnider 2004

Cash Management
Current Assets Cash A/R Inventory Total Current Assets Other Assets Equipment Depreciation Total Assets Liabilities Equipment Loan OE 20,000 21,000 41,000 20,000 (200) 7,400 6,000 7,800 21,200

20.000-(2,000+800+9,800) 10,000-(200-2,000)

Total L + OE
Neil Shnider 2004

41,000
10

Cash Management
Cash Statement
Operating Activity
Net Income + Depreciation Accounts Receivable Inventory Net cash from operations $1,000 200 (6.000) (7,800) ($12,600)

Neil Shnider 2004

11

Cash Management
Taking control of the businesss available cash and planning for its timely cash requirements.

Neil Shnider 2004

12

Cash Management
Having adequate cash to meet operating and investment requirements Having adequate cash to grow/expand Having adequate cash to compensate investors/owners (you)

Neil Shnider 2004

13

CASH IS KING!

Out-of-Cash

Out-of-Business

Neil Shnider 2004

14

Cash Management
Dividends Accounts Receivable

Financing Activities

Cash
Investments Inventory Accounts Payable Operating Expenses
15

Neil Shnider 2004

Cash Management
Cash vs. Cash Flow
Cash is ready money in the bank or in the business. It is not inventory, it is not accounts receivable (what you are owed), and it is not property. These can potentially be converted to cash, but can't be used to pay suppliers, rent, or employees

Neil Shnider 2004

16

Cash Management
Cash vs. Cash Flow
Cash flow refers to the movement of cash into and out of a business. Watching the cash inflows and outflows is one of the most pressing management tasks for any business. The outflow of cash includes those checks you write each month to pay salaries, suppliers, and creditors. The inflow includes the cash you receive from customers, lenders, and investors.
Neil Shnider 2004 17

Cash Management:Cash Flow

Ideal situation
Have cash inflow every time you have a cash outflow

Real world
Cash outflows occur at different times than cash inflows
More often than not, cash inflows lag cash outflows

Creates CASH

GAP
18

Neil Shnider 2004

Cash Management
Examine the timing of the cash inflows and cash outflows Examine the different components (elements, items) that have a direct effect on cash flow

Neil Shnider 2004

19

Cash Management
Understanding the cash flow cycle
Cash Reservoir
Main flow is through
Inventories Shipments to customers and accounts receivable and back to cash

Everything else in the system is there to support this flow

Neil Shnider 2004

20

Cash Management
Cash reservoir comes from:
Share owners Borrowing Marketable securities Current operation Fixed assets

Neil Shnider 2004

21

Cash Management
Cash reservoir is used for:
Plant and equipment Operating expenses Inventory Accounts receivables Dividends Taxes Interest

Neil Shnider 2004

22

Cash Management
Cash Projections
Sources of Cash
Checking account balance at beginning of period + Estimated cash sales + Estimated collection of credit sales + Other sources + Borrowing anticipated + increase in payables or debt + increase in sale of assets

Uses of Cash - Bills to be paid - Taxes to be paid - Loan payments - Assets to be purchased - Dividends to be paid

Neil Shnider 2004

23

Cash Management:Sources
Where does cash come from?
Internally
profits (retained earnings) selling assets reducing inventories reducing receivables increasing payables

Externally
debt equity

Neil Shnider 2004

24

Cash Management
Cash In
Cash sales Account receivables received Interest income Sale of assets
Fixed Current

Loan proceeds Borrowing-debt Stockholders investments

Neil Shnider 2004

25

Cash Management
Cash Out
Advertising Bank Service Charges Credit Card Fees Delivery Health Insurance Other Insurance Interest paid Inventory purchases Office expenses Payroll Payroll taxes

Professional Fees Rent of Lease Subscriptions & Dues Supplies Taxes & Licenses Utilities & Telephone Capital Purchases Loan Repayment Owners withdrawal Retirement & Other Benefits Suppliers

Neil Shnider 2004

26

Cash Flow Management: Working Capital Control

Accounts Receivables Inventory Accounts Payable

Neil Shnider 2004

27

Cash Management: Working Capital

Current assets current liabilities
(A/R + Inventory) Payables Not liquid, cant be used to pay bills Opportunity cost

Neil Shnider 2004

28

Cash
Is not Net profit + depreciation Is Net Profit
+ Depreciation -Increases (or + Decreases) A/R -Increases (or + Decreases) Inventory +Increases (or Decreases) A/P -Decrease (or + Increases) Notes Payable = Net Cash Flow from operations

Neil Shnider 2004

29

Operating and Cash Cycle

Neil Shnider 2004

30

Cash Management
Cash Conversion Cycle (Operating Cycle)
The number of days it takes a company to purchase materials (inventory), convert it into finished goods, pay for the goods, sell the finished goods to a customer and receive payment from the customer

Neil Shnider 2004

31

Cash Management:
Managing Accounts Receivables
Sales that have not yet been collected in the form of cash Creates negative (-) cash flow effects How long does it take for the average person to pay their bill?
Credit policy Credit terms A/R to sales ratio
Neil Shnider 2004 32

Managing Cash:Example
Accounts receivable Aging Schedule Measuring average collection period Billing $200,000 for the year and youre A/R outstanding is $20,000, then: 20,000 (200,000/365) = 37 days

Neil Shnider 2004

33

Managing Cash:Example

Reduce the days outstanding (DOS) from 37 to 26

(11 days x $548.00)

This increases the cash available by over $6,000.00

Neil Shnider 2004 34

Cash Management: Managing Inventory

The extra merchandise or supplies the business keeps on hand.
Uses up cash

Neil Shnider 2004

35

Cash Management: Inventory

Number of Days Inventory is on the Self. Number of Days to sell Inventory (DIO)

Average Inventory (Cost of Goods Sold/365)

Neil Shnider 2004

36

Cash Management: Inventory

Cost of Goods Sold $73,000 Average Inventory $8,000 73,000/365 = $200/day 8,000/200 = 40 days 8,000 (73,000/365) = 40 days

Neil Shnider 2004

37

Cash Management: Managing Inventory/Supplies

How much inventory/supplies do I need without losing sales or running out? Excessive inventory not only uses cash but
Decreases profits
Obsolescence Theft Opportunity costs

Neil Shnider 2004

38

Cash Management: Accounts Payable

Amounts you owe to your suppliers Free source of financing Managing the length of time helps to finance the accounts A/R and Inventory

Neil Shnider 2004

39

Cash Management: Managing Accounts Payables

Can I work with my suppliers to not be on C.O.D.? Can I stretch out the number of days that I owe my suppliers?

Neil Shnider 2004

40

Cash Management: Managing Accounts Payables

Days Payable Outstanding (DPO) Average Accounts Payable (Cost of Goods Sold/365)

Neil Shnider 2004

41

Cash Management: Managing Accounts Payables

Cost of Goods Sold $73,000 Average accounts payable $6,000 Daily sales $200 6,000 (73,000/365) = 30 days

Neil Shnider 2004

42

Cash Management
Cash Conversion Cycle
Consists of three components
Days Sales Outstanding (DSO) Days Inventory Outstanding (DIO) Days Payables Outstanding (DPO)

Neil Shnider 2004

43

Cash Management
Cash Conversion Cycle (CCC)
DSO
DPO DIO

Average Accounts receivable

(Sales /# days in period) Accounts Payable (Cost of Sales/ # days in period) Average Inventory (Cost of Sales/ # days in period)

Neil Shnider 2004

44

Cash Management
Example of CCC Calculate the second quarter of Pfizer and Warner-Lambert (numbers are in millions)
Pfizer
Accounts Receivable 3,396 Sales 3,779

Warner-Lambert
1,949 3,151

Inventory
Cost of Sales Accounts Payable

1,805
476 770

1,027
723 723

Neil Shnider 2004

45

Cash Management
CCC Example Results
Pfizer DSO DIO 81 341 WarnerLambert 56 128

DPO
= CCC

(146)
276
Neil Shnider 2004

(212)
(28)
46

Cash Management
How long can the company keep up with its bills, using only cash & other liquid assets? Cash + Marketable Securities + A/R Average daily expenditures from operations

Neil Shnider 2004

47

Cash Management
Methods to free up cash
Tax savings
Inventory methods
LIFO v. FIFO

Depreciation (Cost recovery methods)

179 Double accelerated depreciation

1031 exchange 1202 stock sale of small business

Neil Shnider 2004

48

Cash Management
Invest surplus cash Manage accounts receivable
Target unpaid receivables

Manage accounts payable Manage inventory

Ask suppliers for a loan

Manage debt
Use credit cards Juggle bills

Use alternative sources of financing

49

Neil Shnider 2004

Cash Management
What is the quality of your earnings? Cash Receipts Sales Cash Flow from Operations Net Income

Neil Shnider 2004

50

Cash Management: Growth

Uses Cash
Increase
Inventory Administrative costs Payroll Marketing Insurance Taxes

Neil Shnider 2004

51

Cash Management: Growth

Profits may decrease
Lower prices to attract more sales Special deals Contracts Buy more to get better costs and ROI Fixed costs increase Loosening up of credit terms Give away discounts

Neil Shnider 2004

52

Cash Management: Growth

Break Even point is constantly changing as fixed and variable costs change To keep employees may have to offer more benefits
Profit sharing Dental, medical

Employer taxes increase with increase in sales

Workers compensation, FICA, Medicare, Etc.

Insurance and risks increase with increase in sales

Neil Shnider 2004 53

Cash Management: Conclusion

Find Cash
Increase terms with suppliers Decrease credit terms with customers Smooth out timing of cash out with cash in

Neil Shnider 2004

54

Cash Management: Conclusion

Understand what your cash needs are Develop relationships with your suppliers and your customers Do cash budgeting

Do not give up cash for profits

Neil Shnider 2004

55

Thanks for your attention

Neil Shnider 2004

56