How can I make a profit and still run out of cash?

1. How can I make a profit and still run out of cash? Review Financial StatementsCash Flow and Working Capital

2. Foundations Update • …and the market continues to be competitive • More products • More aggressive • More options

3. Round 0

4. Round 1

5. Round 2

6. The story thus far… • Key points of strategy: • Product characteristics • Positioning • matching ideal spot - critical in High Tech segment • Margin • pricing not high enough • costs not low enough • automation too low • low tech positioning too aggressive • MTBF too high

7. The story thus far… • Sales forecasts • possibly not accounting for lag in product introduction • may need to plan for full-scale product demand in 2 years – not 1 • Liquidation • older products? • Products • developing new products v. repositioning current products a viable strategy? What are the trade-offs? • Cash management • running out of cash & making a profit?

8. Business Activities Your Cash Management decisions: • Operating: using $ create goods /services/ exchanges • Investing:what do you do with $acquire assets (stuff) to run a businessrenting $ to others (who earn higher return) • Financing:where do you get $funds to start and grow a business (debt / equity / retained earnings)

9. Operating Run the company that you have… with Working Capital Production cash & accts payable ==> inventory Sellinginventory ==> cash & accts receivable

10. Where is the Working Capital? • On the Balance Sheet, Working Capital shows up as: • Current Assets • Current Liabilities

11. Balance Sheet ASSETS 2008 2007 operating working capital $0 4,898 Cash $5,916 4,940 Accounts Receivable Inventory $8,120 0 Total Current Assets $14,306 $ 9,838 Plant & Equipment $48,800 $28,200 Accumulated Depreciation ($11,181) ($7,928) Total Fixed Assets $37,619 $20,272 Total Assets $51,655 $30,110 LIABILITIES & OWNER'S EQUITY operating working capital Accounts Payable $4,926 $3,901 Current Debt $11,273 $ 867 Long Term Debt $15,833 $10,333 Total Liabilities $32,032 $15,101 Common Stock $4,313 $2,313 Retained Earnings $15,310 $12,679 Total Equity $19,623 $15,010 Total Liabilities & Equity $51,655 $30,110

12. Inventory • Too little inventory • sell all the sensors you make ==> STOCK OUT • lost sales & opportunities ==> bad management • Too much inventory • inventory is expensive- it ties up cash • product “ages” and is less desirable • Just right • 1 or more units left • less than 60 days (production scheduled/6)

13. Where is the Working Capital? • Cash has been depleted from last year. Where is it? • It was eaten up by inventory – a result of poor sales forecasting • Carrying costs • Accounts payable increased • Partially offsets high inventory levels (it is like an interest free loan from vendors)

14. Where is the Working Capital? • Current Debt has increased by $10,406 • If sales are increasing and need to fund inventory and accounts receivables (current assets), this may be justified. • It is not a good idea to fund long term assets (plant and equipment) with short term debt, because it could take years for this investment to pay off.

15. Cash Accounts Receivable Inventory Sales Working Capital and Cash Flow • Business Cycle Accounts Payable Less • If you turn a lot of cash into inventory • but less inventory back into cash (a lot of inventory left over) • you run out of cash (its in the warehouse waiting to be changed back)

16. Business Activities Your Cash Management decisions: • Operating: using $ create goods /services/ exchanges • Investing:what do you do with $acquire assets (stuff) to run a businessrenting $ to others (who earn higher return) • Financing:where do you get $funds to start and grow a business (debt / equity / retained earnings)

17. Investing Create company you want to run? • Build a new factory? • Increase capacity for a current product? • Increase Automation? • All will increase Plant & Equipment, so it follows that… • Any increase in the value of plant and equipment is an increase in capacity or an investment in your company

18. Capacity If you increase your capacity, it is a long-term investment long term or fixed asset and you should generate the funds from – • long term sources: • retained earnings • issue bonds • issue stock

19. Balance Sheet ASSETS 2008 2007 operating working capital $0 4,898 Cash $5,916 4,940 Accounts Receivable Inventory $8,120 0 Total Current Assets $14,306 $ 9,838 investing Plant & Equipment $48,800 $28,200 Accumulated Depreciation ($11,181) ($7,928) Total Fixed Assets $37,619 $20,272 Total Assets $51,655 $30,110 LIABILITIES & OWNER'S EQUITY operating working capital Accounts Payable $4,926 $3,901 Current Debt $11,273 $ 867 Long Term Debt $15,833 $10,333 Total Liabilities $32,032 $15,101 Common Stock $4,313 $2,313 Retained Earnings $15,310 $12,679 Total Equity $19,623 $15,010 Total Liabilities & Equity $51,655 $30,110

20. Business Activities Your Cash Management decisions: • Operating: using $ create goods /services/ exchanges • Investing:what do you do with $acquire assets (stuff) to run a businessrenting $ to others (who earn higher return) • Financing:where do you get $funds to start and grow a business (debt / equity / retained earnings)

21. Financing Funds to grow & operate • Borrow- issue bonds • Take on owners- Issue stock • Reinvest profits- increase retained earnings Extra cash (no investments to make) • retire bonds (lower interest payments) • retire stock (only if stock price is low) • pay dividend - (increase stock price) • Give the money back to rightful owners if you don’t have anything better to do with it

22. Financing… Put your worst case scenario in Marketing’s Unit Sales Forecast • Finance long term investments with long term options (stock or bonds) • Cover operating expenses with short term loans • Ending cash position target • 3.5% and 7% of total assets

23. Balance Sheet ASSETS 2008 2007 operating working capital $0 4,898 Cash $5,916 4,940 Accounts Receivable Inventory $8,120 0 Total Current Assets $14,306 $ 9,838 investing Plant & Equipment $48,800 $28,200 Accumulated Depreciation ($11,181) ($7,928) Total Fixed Assets $37,619 $20,272 Total Assets $51,655 $30,110 LIABILITIES & OWNER'S EQUITY operating working capital Accounts Payable $4,926 $3,901 Current Debt $11,273 $ 867 Long Term Debt $15,833 $10,333 financing Total Liabilities $32,032 $15,101 Common Stock $4,313 $2,313 Retained Earnings $15,310 $12,679 Total Equity $19,623 $15,010 Total Liabilities & Equity $51,655 $30,110

24. Balance Sheet ASSETS 2008 2007 $0 4,898 Cash $5,916 4,940 Accounts Receivable 2 snapshots Inventory $8,120 0 Total Current Assets $14,306 $ 9,838 Plant & Equipment $48,800 $28,200 Accumulated Depreciation ($11,181) ($7,928) What changed as a result of the year’s operations? Total Fixed Assets $37,619 $20,272 Total Assets $51,655 $30,110 LIABILITIES & OWNER'S EQUITY Accounts Payable $4,926 $3,901 Current Debt $11,273 $ 867 Long Term Debt $15,833 $10,333 Total Liabilities $32,032 $15,101 Common Stock $4,313 $2,313 Retained Earnings $15,310 $12,679 Total Equity $19,623 $15,010 Total Liabilities & Equity $51,655 $30,110

25. Balance Sheet ASSETS 2008 2007 change $0 4,898 ($4,898) Cash $5,916 4,940 ($ 976) Accounts Receivable Inventory $8,120 0 ($ 8,120) Total Current Assets $14,306 $ 9,838 change as a result of the year’s decisions Plant & Equipment $48,800 $28,200 ($20,600) Accumulated Depreciation ($11,181) ($7,928) 3,253 Total Fixed Assets $37,619 $20,272 Total Assets $51,655 $30,110 LIABILITIES & OWNER'S EQUITY Accounts Payable $4,926 $3,901 $1,025 Current Debt $11,273 $ 867 $10,406 Long Term Debt $15,833 $10,333 $ 5,500 Total Liabilities $32,032 $15,101 Common Stock $4,313 $2,313 $2,000 Retained Earnings $15,310 $12,679 $2,631 Total Equity $19,623 $15,010 Total Liabilities & Equity $51,655 $30,110

26. Balance Sheet changedecisions ASSETS 2006 2007 ran out $ $0 4,898 ($4,898) Cash $5,916 4,940 ($ 976) Accounts Receivable Unsold sensors Inventory $8,120 0 ($ 8,120) Total Current Assets $14,306 $ 9,838 Plant & Equipment $48,800 $28,200 ($20,600) big invest. Accumulated Depreciation ($11,181) ($7,928) 3,253 Total Fixed Assets $37,619 $20,272 Total Assets $51,655 $30,110 LIABILITIES & OWNER'S EQUITY Accounts Payable $4,926 $3,901 $1,025 e-loan Current Debt $11,273 $ 867 $10,406 Long Term Debt $15,833 $10,333 $ 5,500 long term financing Total Liabilities $32,032 $15,101 Common Stock $4,313 $2,313 $2,000 profitre-invested Retained Earnings $15,310 $12,679 $2,631 Total Equity $19,623 $15,010 Total Liabilities & Equity $51,655 $30,110

27. Cash Flow Statement • Shows movement of cash in and out of an organization over a given period • Shows how much cash is available for use during a given period • Reconciles net profit back to cash • operating activities • investing activities • financing activities

28. Cash Flows from Operating Activities Net Income (Loss) $2,631 Adjustment for non-cash items Depreciation $3,253 How canyou makeaprofitand still take ane-loan Change in Current Assets and Liabilities Accounts Payable $1,025 Inventory ($8,120) Accounts Receivable ($976) Net cash from operations Cash Flows From Investing Activities Plant Improvements ($20,600) Cash Flows from Financing Activities Dividends Paid Sales of Common Stock $2,000 Purchase of Common Stock Cash from long term debt $5,500 Retirement of long term debt Change in current debt (net) $10,406 Net cash from financing activities Net change in cash position ($4,898) Closing cash position $0

29. Cash Flows from Operating Activities profit Net Income (Loss) $2,631 Adjustment for non-cash items Depreciation $3,253 Change in Current Assets and Liabilities Accounts Payable $1,025 Inventory ($8,120) Accounts Receivable ($976) Net cash from operations Cash Flows From Investing Activities increased capacity Plant Improvements ($20,600) Cash Flows from Financing Activities Dividends Paid Issue stock Sales of Common Stock $2,000 Purchase of Common Stock Cash from long term debt $5,500 Issue bonds Retirement of long term debt Change in current debt (net) $10,406 Net cash from financing activities Net change in cash position ($4,898) Closing cash position $0

30. Cash Flows from Operating Activities Net Income (Loss) $2,631 Adjustment for non-cash items Depreciation $3,253 Change in Current Assets and Liabilities Accounts Payable $1,025 Change in Inventory At a unit cost=$24, this is 338 units Inventory ($8,120) Accounts Receivable ($976) Net cash from operations Cash Flows From Investing Activities Plant Improvements ($20,600) Cash Flows from Financing Activities Dividends Paid Sales of Common Stock $2,000 Purchase of Common Stock Cash from long term debt $5,500 Retirement of long term debt Change in current debt (net) $10,406 Net cash from financing activities Net change in cash position ($4,898) Closing cash position $0

31. Cash Flows from Operating Activities Net Income (Loss) $2,631 Even with a profit … too muchinventory and a huge investmentwith… too little long termfinancingand you haveto take ane-loan Adjustment for non-cash items Depreciation $3,253 Change in Current Assets and Liabilities Accounts Payable $1,025 Inventory ($8,120) Accounts Receivable ($976) Net cash from operations Cash Flows From Investing Activities Plant Improvements ($20,600) Cash Flows from Financing Activities Dividends Paid Sales of Common Stock $2,000 Purchase of Common Stock Cash from long term debt $5,500 Retirement of long term debt Change in current debt (net) $10,406 Net cash from financing activities Net change in cash position ($4,898) Closing cash position $0