Cash is king

Cash is king – improve yourbusiness’ cash flowMichael CatovskyKingston Maurward College8 May 2012

IntroductionTheory▪ Time value of money▪ Cash flow forecasts▪ Working capital cyclePractical steps▪ Dealing with suppliers▪ Stock control▪ Credit control▪ Treasury and foreign exchange managementCash is king: improve your business’ cash flow – Michael Catovsky – 8 May 2012 2

Time value of money - 1Cash is king: improve your business’ cash flow – Michael Catovsky – 8 May 2012 3

Time value of money - 2Cash is king: improve your business’ cash flow – Michael Catovsky – 8 May 2012 4

Time value of money - 3Key concepts▪ Cost of finance▪ Risk premia▪ Repercussions for business valuationCash is king: improve your business’ cash flow – Michael Catovsky – 8 May 2012 5

Cash flow forecastTemplate▪ www.businesslink.gov.uk/Finance_files/Cash_Flow _Projection_Worksheet.xls▪ VAT and other traps.▪ Include all overheadsWhy bother?▪ Financing levels & capital expenditure budgets▪ Mitigate problems before they arise▪ Familiarity with underlying business model, e.g. pricingOther thoughts▪ Period▪ Review forecasts retrospectively▪ Keep an open mindCash is king: improve your business’ cash flow – Michael Catovsky – 8 May 2012 6

Working capital cycle - 1Cash is king: improve your business’ cash flow – Michael Catovsky – 8 May 2012 7

Working capital cycle - 2Cash is king: improve your business’ cash flow – Michael Catovsky – 8 May 2012 8

Cash conversion cycle - 1Cash is king: improve your business’ cash flow – Michael Catovsky – 8 May 2012 9

Cash conversion cycle – 2Cash is king: improve your business’ cash flow – Michael Catovsky – 8 May 2012 10

Funding options for cash cycle▪ Owners’ capital / retained earnings▪ Bank loans / overdrafts▪ Non-bank short-term finance / asset finance▪ Factoring / discounting (see below)▪ Share capital / investors▪ Speak to your financiers and get them to buy-in to your business plan and cash flow forecasts. Their experience can offer an additional benefit.Cash is king: improve your business’ cash flow – Michael Catovsky – 8 May 2012 11

Dealing with suppliers▪ Utilise your full credit terms if interest-free▪ Balance this with prompt payment discounts▪ Get administration in place – system for recording purchase invoices and making payment towards end of credit period▪ Don’t take on unnecessary foreign exchange risk▪ Consider switching suppliers if greater credit terms are available▪ Improve your credit rating by filing accounts early and reviewing balance sheet▪ (Negotiate on price, delivery times, quality, credit terms…)Cash is king: improve your business’ cash flow – Michael Catovsky – 8 May 2012 12

Stock control▪ Balance purchasing everything to order with having enough goods in house [shortage costs]▪ Plan ahead for requirement of goods▪ Consider the cash (and practical costs) of holding a lot of stock [holding costs]▪ Balance bulk order discounts with holding costs▪ Clear out obsolescent stock▪ Review re-order levels▪ Aim to be “just in time”Cash is king: improve your business’ cash flow – Michael Catovsky – 8 May 2012 13

Credit controlCosts of allowing credit▪ Interest foregone / cash costs of funds tied-up▪ Costs of assessing customer credit worthiness▪ Administration costs▪ Bad debts▪ Cash discounts (for prompt payment)▪ Foreign exchange losses (see below)Costs of denying credit▪ Loss of customer goodwill / sales▪ Inconvenience▪ Loss of securityCash is king: improve your business’ cash flow – Michael Catovsky – 8 May 2012 14

Debtor management▪ Avoid offering credit – accept credit cards and encourage electronic payments (e.g. BACS)▪ Reduce credit terms given and set out in writing in advance and back of invoice▪ Ask for deposits, stage payments or regular standing orders (esp. for large orders)▪ Offer prompt settlement discounts – watch for VAT implications▪ Assess and monitor customer credit rating▪ Collection procedures▪ Consider invoice discounting and factoring▪ Monitor key accounts (the 80/20 rule)▪ Stick to credit limits and beware of large orders▪ Credit insurance or legal expenses insurance▪ New businesses are targets for those who have exhausted credit elsewhereCash is king: improve your business’ cash flow – Michael Catovsky – 8 May 2012 15

Collection procedures▪ Monitor sales from receipt of purchase order – tracking system▪ Be efficient and prompt at invoicing – make sure they are clear▪ Confirm receipt of invoice after a couple of days and check all in order (to avoid disputes later)▪ [Check that payment is scheduled near due date]▪ Eliminate statements which age debts▪ Telephone or visit on the day it becomes overdue▪ Stick to your payment terms▪ Cut off further credit without delay▪ Charge interest and debt recovery costs on late payments (statutory rights to claim if not paid on time.) Maximum interest chargeable is base rate plus 8%▪ Court action or other formal processes only if they have meansCash is king: improve your business’ cash flow – Michael Catovsky – 8 May 2012 16

Factoring and invoice discountingFactoring▪ Sale of invoices to third party at a discount▪ The factor arranges debt collection and ledger managementInvoice discounting▪ Draw money against invoices but your business retains control over the administration (subject to parameters.)▪ Provides support and credit insurance (if non-recourse)▪ Can be used selectively▪ Evaluate charges against other sources of finance▪ Consider the impression given to your customersCash is king: improve your business’ cash flow – Michael Catovsky – 8 May 2012 17

Treasury and foreign exchangeTreasury management▪ Investment of surpluses to keep the cash working▪ Planning short- and long-term borrowing▪ Cost efficient cash transmissionForeign exchange – options to reduce transaction risk▪ Do nothing (and let gains and losses net off)▪ Invoice in sterling (but will depend on your customers)▪ Foreign currency bank account / matching▪ Forward exchange contract▪ Money market hedgeCash is king: improve your business’ cash flow – Michael Catovsky – 8 May 2012 18

Other points▪ Sale and leaseback of assets▪ Operating lease instead of purchase▪ Reduce general business overheads▪ Wages – weekly or monthly▪ Dangers of overtrading▪ If working capital requirements fall short, look at methods of injecting long-term cash (inc. reducing drawings)▪ Outsource non-core function to keep flexible and delay payment times▪ Stay up-to-date with your booksCash is king: improve your business’ cash flow – Michael Catovsky – 8 May 2012 19

Summary▪ Your business is not a bank so don’t be pressured into acting like one▪ Take full credit terms freely on offer▪ Keep stock holdings as low as possible▪ Conduct a full cash management review▪ Think creatively about options for improving and seek professional advice when requiredCash is king: improve your business’ cash flow – Michael Catovsky – 8 May 2012 20

Cash is king – improve yourbusiness’ cash flowMichael CatovskyKingston Maurward College8 May 2012

Cash is king

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