cm
Content
Cash Management
Neil Shnider, RPh, MBA, CPA
© Neil Shnider 2004
1
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 didn’t 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
3
Profit is not cash
“Profit” is an accountant’s abstraction
© Neil Shnider 2004
4
Profit v. Cash
• Profit is Revenue - Expenses • Cash is Receipts - Disbursements
© Neil Shnider 2004
5
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
6
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 business’s 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, can’t 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 you’re 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
Neil Shnider, RPh, MBA, CPA
© Neil Shnider 2004
1
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 didn’t 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
3
Profit is not cash
“Profit” is an accountant’s abstraction
© Neil Shnider 2004
4
Profit v. Cash
• Profit is Revenue - Expenses • Cash is Receipts - Disbursements
© Neil Shnider 2004
5
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
6
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 business’s 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, can’t 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 you’re 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
