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Cash, the King of Finance - Doug Smith

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Doug Smith, a partner in B2B CFO talks about business financing and how cash is king.

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Cash, the King of Finance - Doug Smith

  1. 1. Presentation to cpa moms™ Doug Smith B2B CFO®December 20, 2011
  2. 2. What Is B2B CFO® ?Established: Founded in 1987National : 211 Partners in 39 states, 6,000 years of experienceFocused: Privately-held companies with sales between $1 - $70MAffordable: Part-time CFO services
  3. 3. Who Am I?• 33 Years in Operations, Finance, Administration• COO, CFO, CAO• Government Contracting, IT, Healthcare• M&A experience (seller, buyer)• BS Engineering, MBA
  4. 4. The CFO’s Main Rule•CASH IS KING – For most small businesses, cash is most of the rest of the royal family also
  5. 5. What Financial Reports Say About the Business• Income Statement (P&L) – It’s a look at past history, not the present or future – Positive income ≠ More cash• Balance Sheet – It’s a snapshot – Doesn’t show money to be received from invoices sent out but not paid – Doesn’t show the money needed for next week’s payroll
  6. 6. What Financial Reports Say About the Business (cont’d)• Some non-cash expenses show up in the P&L – Depreciation – Amortization• Some cash expenses don’t show up in the P&L – Outlays to purchase capital equipment – Loan principal repayments – Owner distributions
  7. 7. Cash – It’s All About the Timing Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Revenue $5,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $115,000 Expenses $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $90,000 Profit ($2,500) $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $25,000Cash Income $5,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $95,000 ReceivedCash Balance ($7,500) ($15,000) ($17,500) ($15,000) ($12,500) ($10,000) ($7,500) ($5,000) ($2,500) $0 $2,500 $5,000
  8. 8. Cash – It’s All About the Timing (cont’d) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Revenue $5,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $115,000 Expenses $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $7,500 $90,000 Profit ($2,500) $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $2,500 $25,000Initial Equity $20,000Cash Income $5,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $10,000 $95,000 ReceivedCash Balance $12,500 $5,000 $2,500 $5,000 $7,500 $10,000 $12,500 $15,000 $17,500 $20,000 $22,500 $25,000Cash Balance ($7,500) ($15,000) ($17,500) ($15,000) ($12,500) ($10,000) ($7,500) ($5,000) ($2,500) $0 $2,500 $5,000minus Equity
  9. 9. Cash – It’s All About the Timing (cont’d) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Total Revenue $10,000 $11,000 $12,000 $13,000 $14,000 $15,000 $16,000 $17,000 $18,000 $19,000 $20,000 $21,000 $186,000 Expenses $8,500 $9,000 $9,500 $10,000 $10,500 $11,000 $11,500 $12,000 $12,500 $13,000 $13,500 $14,000 $135,000 Profit $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 $5,000 $5,500 $6,000 $6,500 $7,000 $51,000Initial Equity $20,000Cash Income $10,000 $11,000 $12,000 $13,000 $14,000 $15,000 $16,000 $17,000 $18,000 $19,000 $145,000 ReceivedCash Balance $11,500 ($9,000) $500 $1,000 $1,500 $2,000 $2,500 $3,000 $3,500 $4,000 $4,500 $5,000Cash Balance ($8,500) ($29,000) ($19,500) ($19,000) ($18,500) ($18,000) ($17,500) ($17,000) ($16,500) ($16,000) ($15,500) ($15,000)minus Equity
  10. 10. QuickBooks and Cash Flow• Mapping between Profit and Loss, Balance Sheet, and Statement of Cash Flows
  11. 11. Forecasting Cash Flow• At a minimum, forecast next 3 months• Forecast each week in the month• For small expense categories, use 3-6 month rolling historical average• Show large cash needs (e.g., payroll, rent) in the week they occur• Don’t forget other extraordinary cash needs (e.g., owner distributions for quarterly tax payments)• Be reasonable and conservative in forecasting income (probability of collecting > 90%)• Learn over time – Keep past forecasts, compare to what actually happened – Adjust forecasting methodology based on lessons learned
  12. 12. Cash Forecast Example Week (future) 1 2 3 4 5 6 7 8 9 10 11 12 13Beginning Balance $100,000 $95,000 $120,000 $109,000 $134,000 $129,000 $154,000 $149,000 $148,000 $143,000 $168,000 $163,000 $182,000Cash Income $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 $40,000 $40,000ReceivedPayroll (bi-weekly) $30,000 $30,000 $30,000 $30,000 $30,000 $30,000 $30,000Rent (monthly) $6,000 $6,000 $6,000Quarterly Tax $20,000PaymentOther Non-Labor $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000 $15,000Cash ExpensesTotal Cash Expense $45,000 $15,000 $51,000 $15,000 $45,000 $15,000 $45,000 $41,000 $45,000 $15,000 $45,000 $21,000 $45,000Net Cash ($5,000) $25,000 ($11,000) $25,000 ($5,000) $25,000 ($5,000) ($1,000) ($5,000) $25,000 ($5,000) $19,000 ($5,000)Ending Balance $95,000 $120,000 $109,000 $134,000 $129,000 $154,000 $149,000 $148,000 $143,000 $168,000 $163,000 $182,000 $177,000
  13. 13. Getting Information on Cash• From the Bank? – Not a good idea to rely on bank balance • (Although many owners do) – Bank account doesn’t show: • Checks written, but not yet presented to bank for payment • Payments received by the business, but not yet deposited• From the Accounting System? – Good source, AS LONG AS system has been used completely, and kept up to date – Reconcile monthly bank statements against what’s in accounting system as part of month-end close
  14. 14. Improving Your Cash Position• Retained earnings – keep cash in the business• Shorten A/R days – Close the books as soon as possible after the month ends – Send invoices by e-mail rather than snail mail – Ensure invoices are clear and complete • Write the expected due date on the invoice – Get paid electronically – Use a lockbox at the bank to receive cash payments – Actively work the A/R list, following up on invoices outstanding more than 30 days
  15. 15. Improving the Cash Position (cont’d)• Reduce inventory carrying costs – Use “just in time” supply chain procedures – only receive parts just before needed for production• Accounts payable – Only pay in accordance with contractual payment terms – For Net 30 terms, pay on day 30, not before• Reduce Bad Debt – Have customers fill out a credit application – Check customer reference, Dun & Bradstreet info, etc.
  16. 16. Improving the Cash Position (cont’d)• Partner with a collection agency – Use them to collect older, uncollected invoices – There’s a cost, but it’s better than not receiving payment at all – Use a Factor • Use only if you’re in a cash crisis • Factors lend cash through a process where you sell them your A/R – They advance you a portion (70-85%) of the A/R balance • When payment received, you receive the balance of the money not advanced, minus their discount fee – Imputed interest rate much higher than a bank loan (30-40% APR)
  17. 17. Special Considerations for S Corporations• Many S Corporations file their taxes on a cash accounting basis (even if books are maintained on accrual basis)• To minimize taxes: – Prepay some expenses (e.g., rent) – Stretch some receivables into the next tax year – BUT, you can only do these if you have enough available cash
  18. 18. Best Practice Example: Dell Computer• Cash conversion time: time between when a sale is made and the cash is received – Dell’s is MINUS 15 days• Dell gets your money as soon as you order• Dell’s supply chain process – Parts are delivered to Dell factory, but placed in a special holding area • Still considered the property of the supplier • Can sit there for a week or more – Parts move into Dell’s inventory only when moved to the computer assembly bench – The computer is built that day, and mailed to the customer within 2-3 days
  19. 19. Questions? Comments?Doug SmithPartner, B2B CFO®e-mail: dougsmith@b2bcfo.comphone: 703.927.9823website: www.dougsmithcfo.com

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