Corality - Cash flow management for critical decision making
Business OperationsCoralityCash Flow Managementfor Critical Decision Making
Setting the scene ASX fell 43% in 2008 – largest ever drop Consumer confidence remains dented: borrowing less spending less Economic growth is still slow Recent ACCI Business Expectations Surveys suggest indicators of sales revenue and profit levels were at their lowest levels ever, with three in seven companies expecting profits to fallBut are we focusing on the key issue..?
The importance of cash flow Whether you are a manufacturer, retailer, distributor or service provider, it is important to know and understand the internal and external factors that can impact cash flow The major goal of a business is not to make a profit, but to receive the underlying cash – the process is not complete until then Common factors that affect cash flow Raw materials: Supply delays, sudden price increases and defective material Suppliers: with cash flow problems, tighter credit terms Outsourcing to unsuitable firms Within the business: defective goods, poor infrastructure, unplanned inventory, design problems, delayed deliveries, low sales, selling on credit, labour problems, fraud, obsolete technology, bad financial and staffing decisions, slow moving inventory, employee shortages, lack of expertise and equipment for a specialised job, wrong pricing External: competition, economic fluctuations, changes in law
Business structureConsider this in four parts: Physical Operational Responsibility Financial
Physical structureSimpler structures tend to consume less cash More responsive and adaptable, less bureaucracy Lower fixed costs, “lean and mean” However, do need to consider rapid expansion issues
Operational structure Importance of profit margins Nature of costs: Direct versus indirect Variable versus fixed Operational Leverage formula: Fixed Costs Total Costs Understand drivers of the working capital cycle…
Responsibility structure Culture of responsibility is important Staff remuneration / bonuses can drive productivity and efficiencies – if employed correctly Motivation factors may differ for different types of business unit: Revenue centres Cost centres Profit centres Investment centres Need to consider the business linkages, e.g. Cash Generating Units
Cash flow management The process of monitoring, analysing and adjusting business cash flows Why is it important? Not enough to just focus on increasing sales and improving profit margins Must develop cash management policy to ensure cash flow follows the increases in sales Techniques Financial projections Develop budgets Cost reduction strategy Maintain low salaries and other controllable costs Track accounts receivable, expenses, credit lines
TechniquesProactive Cash discount / price incentive schemes Inventory management, e.g. Just In Time Optimising assets‟ economic lives Lease vs. buy Reducing controllable costs (budget cuts) Refinancing / amending capital structureReactive Accounts Payable teams Credit collection agencies vs. debt factoring Supplier negotiations Vertical integration / partnerships
Cash flow forecasts Cash flow forecasts are vital for Actively managing the cash to ensure survival Obtaining proper advice as to whether to continue to trade Obtaining and maintaining bank support Helps keep control of the cash you have – ensures cash is used efficiently Can verify key drivers of cash inflows and outflows Provides informative variance analysis Should be updated regularly and may have small periodicity
Modelling forecasts Sometimes companies don‟t realise they are running out of cash Need models, not just quarterly or monthly, but also weekly Working Capital Management Model Make critical decisions quickly Ongoing view What are the effects of COGS, payment timing? Help you identify sustainable level of growth Keep a close eye on cash flow, to forecast potential cash flow problems and take steps to remedy them Early detection Ongoing monitoring „What if‟ analysis Answer questions Are we you spending more cash now than what we‟ll receive in the following month? Which customers are slow payers?
Working capital cycle Cash receipts Purchase orders Raw materials Debtors / inventory receivables Work In Progress inventoryDistribution /transit / retailstocking (saleor return?) Other production Finished goods resources inventory
Main cash flow problems1. Failing to plan for market volatility and changing conditions2. Tying up capital in stock and equipment3. Buying long-term assets out of current cash flow4. Collecting accounts receivable too slowly5. Failing to put excess cash to work6. Overtrading