BANBRIDGE DISTRICT ENTERPRISES How to make a Successful Business Even more Successful Practical Working Capital Managem

1. BANBRIDGE DISTRICT ENTERPRISES How to make a Successful Business Even more Successful Practical Working Capital Management and Managing Your Cash Flow Feargal McCormack www.fpmca.com E-mail: f.mccormack@fpmca.com Telephone: 028 302 61010 28 February 2006

2. Programme Outputs • Enhanced Understanding of Finance • Interpretation of Financial Statements • An understanding of the concept of cash flow and how to develop a cash flow forecast • Why, for businesses, CASH and not PROFIT, is king • Why tracking and managing cash flow is critical to business survival • Why cash flow forecasting is an important strategy • Vital warning signs • Sales and Cash receipts monitoring • Working illustration • Strategies to improve your cash flow situation

3. Interpretation of Financial Statements • Profit & Loss Account • Balance Sheet • Cashflow Statement

4. Statutory Profit & Loss Account • Sales • Cost of Sales • Gross Profit • Other Income • Overheads: • Administration • Distribution • Establishment • Financial • Profit Before Interest & Tax • Net Profit • Exceptional Items • Dividends

5. 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

6. Balance Sheet • Fixed Assets • Current Assets • Current Liabilities • Long Term Liabilities • Provision for Liabilities and Charges • Share Capital and Reserves

7. Fixed Assets • Tangible Fixed Assets • Intangible Fixed Assets • Investments • Depreciation

8. Current Assets • Assets held for a short period of time. • Assets that will be converted to cash within one year.

9. 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

10. Current Liabilities • Short-term Obligations • Debts to outside parties due within one year

11. 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

12. 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

13. 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

14. Freeing Up Profits “Are you Sure I Made a Profit”? I have less money now than at the start of the year

15. 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

16. 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

17. What’s Measured In Cash Flow?

18. Freeing Up Profits

19. The Cash Flow Cycle Borrowing Capacity / Shareholder Input Accounts Receivable CASH FLOW RESERVOIR Goods Sold Operating Expenses Tax Plant & Equipment Inventory & Manufacturing Expenses Dividends Interest

20. 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

21. Key Requirements Of Your Cash Flow • Cash flow should have three characteristics; it should be: • Positive • Available • Timely • To achieve this requires planning

22. 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

23. 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

24. 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

25. 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

26. Debtors Management Control REDUCING DEBTOR DAYS Companies can accelerate monies due from debtors by following a few Simple steps: • Review debtors list and establish baseline position • Agree Terms of Business including payment terms in advance • Establish credit practices as a matter of company policy • Establish limits for each category of customer - never allow exposure to slip beyond these limits • Constantly review the limits when times are tough or to customers in weak industries • Agree up front payments or payments on completion of milestones • Assign person with responsibility for the collection of debtors

27. Debtors Management Control • Use credit agencies and bank references before you actually engage in business with potential new customers; • 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.

28. 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

29. Debtors Management Control POTENTIAL BAD DEBT INDICATORS Some of the key indicators about a potential bad debt problem include: • Longer credit terms taken without approval followed by smaller orders • The issue of post-dated cheques by debtors who normally settle within terms • Evidence of regular switching to different suppliers for the same goods • New customers who are reluctant to give credit references • Receiving round sum payments from debtors

30. Creditors Management Control • Who authorises purchasing in your company? Is it tightly managed or spread among a number of people • 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 price increases to your own customers?

31. 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

32. 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 • Efficiency of distribution

33. 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 20% of products

34. 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

35. 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

36. Strategy: Manage Costs • In 99% of cases, there are some (sometimes significant) savings to be made that will improve the cash flow situation

37. 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

38. 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

39. 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

40. 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

41. Strategy: Manage Trading • Overtrading can result in major cash flow problems

42. 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

43. 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

44. 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 • Stock Turnover

45. 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

46. 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

47. 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

48. Monthly Sales and Cash Receipts Monitoring Y/E 30/04/04

49. Monthly Fees Control

50. Monthly Cash Receipts Control