Construction Futures Wales - Managing Cash Flow 2016

1. Managing Cash Flow
Can you afford to ignore it?
Jeff Davies – Cardiff Met

2. What is CFW?
• Partnership between Welsh Government & CITB
Wales
• Joint Investment Strategy £3m gross over 3 years…
• ....to support economic ‘growth’
• Revenue only programme funding specialist
consultancy support

3. How can we help?
• Company Health Check, Full Business Diagnostic,
Benchmarking & Strategy Planning
• Events, Networks, News and Reviews
• Fully Accredited Leadership & Management Courses (Cardiff
Met / CIM)
• Expert Consultancy, Supply Chain Development,
Collaborative Working, Understanding Costs, Sourcing,
Quality Standards, LEAN, (etc)

4. How do I access this?
www.constructionfutureswales.co.uk
www.dyfodoladeiladucymru.co.uk
Click ‘Apply Now’ to start the process
Twitter: @CFW_Wales

5. Press the ‘Apply Now’ button...
• CFW seeks to support ‘growth’ companies
• 10 employees +
• Turnover exceeding £500k
• Potential for growth & development

6. Aims of this session
• To clearly understand that profit and cash can be two
different things
• To develop a process to manage cash
• To measure the vulnerability of your business
• To understand that cash management cannot be
achieved in isolation from other functions in your
business. It is the result of other processes. To
improve your cash flow improve your processes.
• You must not leave here and do nothing

7. Meaning of “the cash management process”
• Effective cash management ensures the timely
provision of cash resources necessary to
support the company’s operations
• You know your business and you know the
importance of cash management otherwise
you would not be here. Presumably you want
to develop a system!

8. Some Questions
• What is the main cause of insolvency?
• Are companies who become insolvent profitable?
• Majority of SME’s do not have a cash-flow forecast, why?
• To develop a cash-flow forecast you need a business plan (budget)
• How many of you have a detailed budget at the start of the year?
• This budget should be summarised into a forecast:
• 1. Balance Sheet
• 2. Profit and Loss Account
• 3. Cash-flow forecast

9. Some Questions
• Which is the most important statement?
• Which is the easiest of the 3 to construct for a non
finance specialist?
• It is the major concern of banks; government bodies
etc in evaluating loan/grant applications
• You cannot delegate this
• It is not a one off exercise to obtain a loan/grant
• To construct a cash-flow forecast you need a plan. This
may be a change of culture for you but it is essential

10. Possible misunderstanding
• Cash-flow Statement
• Cash-flow Forecast

11. Why profit is not cash
• Lets look at the accounts of Brambles Ltd
• Stock adjustments
• Purchase of fixed assets/depreciation
• Repayment of loans
• Credit sales
• Credit purchases
• VAT
• Corp Tax
• Provisions

12. Flow of cash in a Firm
Shareholder
LT & ST LoansDebtors
Total Funds
RMO/HLabourAssets
Stock
Cost

13. Working Capital
• Working capital is Current Assets- Current Liabilities
• This is how you run your business (a cash merry-go-round)
• Working Capital while essential to run a business is :
• Dead money (earns no interest) and
• Is high risk. Debtors may not pay or stock becomes
obsolete.
• An organisation must therefore try to operate with as little
working capital as possible.
• Consequently you must do everything you can to speed up
the merry-go-round (Working Capital Cycle)

14. The cash (Working Capital) cycle
• This measures the time it takes for cash to flow into the
company
• In a construction company you can see the cycle as
being:
• Purchase raw materials(which can be held in stock)
• Construction period (Work- in-progress. productivity!)
• Held in finished goods stock
• Invoice customers
• Final payment (minimise rework)

15. Cash Flow Forecasts
• Constructing a 12 month cash-flow forecast can
be daunting
• Let me make a distinction:
• 1. Operational cash-flow management (working
in the business) 8-12 weeks
• 2. Strategic cash-flow management (working on
the business) 6-12 months

16. Operational Cash-flow Management
• A rolling weekly cash-flow forecast 8-12 weeks
• What sort of commitment to update. 1-1.5
hours per week

17. Constructing a cash-flow Forecast
• You are only interested in those transactions that involve
the physical flow of cash.
• Depreciation ,provisions, adjustments etc have no part to
play in the cash-flow statement.
• Concentrate first on Receipts including VAT (Cash in)
• Now concentrate on Payments including VAT (Cash out)
• Put them together in the Cash flow Forecast.
• Lets look at the example for Brambles Ltd
• A spreadsheet model
• Let look at format of a cash-flow on the next slide

19. Using the cash-flow forecast
• Start with a 8-12 week rolling forecast
• If the forecast shows you will exceed overdraft limit and all cash currently
available you must revisit the plan and make changes. Alternatively if you
think you have a good plan and do not want to change it now is the time
to speak to the bank manager
• You cannot progress with your plans and hope “it will be all right on the
night”
• Get into the habit of holding a monthly meeting to discuss actual
performance against budget and make, if necessary, adjustments
• This meeting gives time for reflection (step back from fighting the fires).
Involve as many of your staff as you can.
• Timely monthly accounts are essential
• Check Current and Quick Ratios at least every month

20. There is no magic solution...
• We cannot look at cash management in isolation
• You must speed up the merry-go-round
• Nothing is more important than generating sales (This
is your role!)
• Realistic estimates (quantities and times)
• Material control
• Time management
• Minimise rework
• Quality and reliability

21. Debtor Control
• Credit screening
• Credit limits
• Clear conditions of sale
• Regular production of statements from error free
accounts
• Aged debt analysis
• Clear procedures to follow in the event of non payment
• Factoring.
• Have a written copy of your debtor control procedure

22. Creditor Control
• Strict control over creation of supplier accounts
• Control of who has authority to purchase supplies
• Control over deliveries
• Check statements carefully
• Take advantage of discounts.
• Strict control of cheque issuing procedures
• Separation of duties

23. Stock Control
• 80/20 rule
• Economic Order Quantity (EOQ)
• Buffer Stock
• Reorder point
• Lead time
• Just in time (JIT)

24. Overtrading
• This is a situation where companies are killed
because of their success
• Their business increases (unplanned)quicker
than expected
• They run out of cash

25. Increasing Working Capital
• An issue of shares to existing shareholders
• An issue of shares to new shareholders
• Long term loans
• Lease or hire purchase
• Factoring debts
• Non payment of dividends
• Ideally by budgetary planning and control these
problems would have been anticipated and planned
for.

26. Vulnerability
• Current Ratio (Current Assets/Current Liabilities) 2:1
• Quick Ratio ((Debtors plus Bank)/Current Liabilities)
1:1
• Interest cover
• EBITDA
• These should be some of the KPI’s you review every
month
• Let us check out the Current Ratio, Quick Ratio and
Interest Cover for Brambles for 2014 and 2015

27. Vulnerability
• Non financial factors:
• 1. one big customer
• 2. licence or patent life
• 3. Key personnel (succession planning)

28. How can I develop these skills and get some help?
• Take the CFW Health Check
• Leadership and Management Programme
• One to One support
• Attend the next CFW Breakfast Briefing on
benchmarking your business
• South Wales April 14th
• North Wales April 21st

29. Any Questions?
• jrdavies@cardiffmet.ac.uk
• 07790291586
• Please complete feedback forms