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? Cash Management

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

3. Round 1

4. Round 2 Plus: • A?? • Bold • Cent • Dabble • East • Feast

5. Now Many Products ?

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 business • loan $ to others (who earn higher return) • Financing:where do you get $ • funds to start and grow a business • debt / equity / retained earnings Working Capital

9. What Is Working Capital? • Working capital • Cash a business requires for day-to-day operations • Financing the conversion of raw materials into finished goods • On the Balance Sheet, Working Capital shows up as: Current Assets - Current Liabilities (cash, inventory, accounts receivable)(accounts payable) • Analysts look at these items for signs of a company's efficiency and financial strength. So Why Do WE Run Out Of Money?

10. 1. Failure to Finance

11. Operating • Working Capital and Cash Flow Raw Materials Cash Accounts Receivable Inventory Sales 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)

12. 75 75 75 75 75 75 75 75 75 75 75 75 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 50 2. Product Availability jan feb mar april may june july aug sept oct nov dec Produce 600 in a year…with 1 shift Produce 1200 in a year…with 2 shifts July 15th Announcement date from R&D

13. Product Availability

15. 3. Poor Forecasting Units * (Labor + Material) = Product Cost 424,000 * $23.64 = $10,023,360 499,000 * $26.12 = $13,033,880 $23,057,240 Inventory * Sales Price = Potential Revenue 424,000 * $34.90 = $14,797,600 499,000 * $44.95 = $22,430,050 $37,227,650 Money Spent Revenue Not Yet Received

16. Inventory • Too little inventory • sell all the sensors you make ==> Stock Out • lost sales & opportunities • 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)

17. Balance Sheet Operating Working Capital Operating Working Capital

18. Selected Financial Statistics

19. Where is the Working Capital? • Cash has been depleted from last year • 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) • Current Debt has increased by $19,116,000 • 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.

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. Investing • Create the company you want to run? • Build a new factory? • Increase capacity for a current product? • Increase Automation? • All will increase Plant & Equipment… • Any increase in the value of plant and equipment is a long term investment in your company • You should generate the funds from – Long term sources: • Retained earnings • Bonds • Stock

22. Balance Sheet Operating Working Capital Investing Operating Working Capital

23. 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)

24. 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

25. 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

26. Balance Sheet Operating Working Capital Investing Operating Working Capital Financing

27. Cash Flow Statement

28. Cash Flow Statement

29. Income Statement