Ca$h Flow ManagementPresented byRobert Coatsworth, MBA (Rotman)Rise Business AdvisorJune 12, 20131
Introduction• From ‘Idea’ to ‘Business Plan’• Financial Management –Who Cares? Why You Should Care!• Financial Statements Overview• Cash Flow Management Basics• The Working Model for Your Business -A Hands-on Workshop2
3From ‘Idea’ to ‘Business Plan’1. Idea – Starting point is your Business concept2. Business Model – Multiple ways to Build the Idea3. Business Case – Validate Key Assumptions of the Model4. Business Plan – Detailed Plan of ActionKey Steps in Creating a Business Plan --
4Getting Started1. Idea – Start a Photography business2. Possible Business Models –• Taking pictures to display and sell?• Get hired to take pictures? Portraits, weddings etc.• Open your own store front studio?• Work from home? Rent studio space when needed• Partner with a business that needs photographicsupport? e.g. a magazine, media agency, real estate• Video and/or still photography?• Subject specialties? e.g. food, fashion, retail products?• A combination of these?• Other??
5Alex Osterwalder’s ‘Business Model Canvas’Developing Your ‘Business Model’
6Developing Your ‘Business Model’Capturing possible elements of a Model
7Developing Your ‘Business Model’Comparing Alternative Business Models:• Value Proposition / Differentiation• Product-based; Service-based• Cash requirements• Revenue potential• Profit potential• Risk profile• Level of effort• Achieving your personal goalsWhat needs am I meeting?
8The ‘Business Case’ for Your ‘Business Model’3. Identifying and Testing Key Assumptions:• Your Value Proposition – Why choose me?• Value is not just Price > Service; Quality;Reliability; Availability; Personality; Style• Customer needs, and willingness to buy• Test your Pricing• Confirm your Input costs• Confirm access to required resources• Competition (includes ‘the way yourpotential customers do things now’)• Regulations / Special Requirements
9Creating Your ‘Business Plan’4. Business Plan –• What do you need to get Started?• Business form? Sole Proprietor? Incorporated?• Start-up equipment and supplies costs?• Can you get started slowly and make furthercommitments as Sales grow?• Bank Account? Business Registration?• Insurance? Website? Portfolio of experience?• What do you need and when do you need it?
10Creating Your ‘Business Plan’Forecasting Revenues and Expenditures:• Identify pre-Revenue Expenditures• Project Revenue streams based on Number ofCustomers and Revenue per Customer• Project on-going Expenditures – Fixed andVariable Expenses; Additional Capital Needs
11Creating Your ‘Business Plan’Forecasting Revenues and Expenditures:• Identify and explain all key Assumptions• Identify key Milestones to measure success• Generate confidence• Be conservative
12Who Cares?• Your Creditors: Rise; and other Suppliers• And You:• Confidence you understand your business• Credibility with third parties• Credit Rating• Track Record and Reputation• Reaching your Goals
Financial Statements Overview• Standard Financial Statements (Accrual Accounting)• Balance Sheet – a point in time picture• Income Statement – measure of activity betweentwo points in time• Statement of Sources and Uses of Cash – howcash was generated or used between two points intime to reconcile opening/closing Cash13
14Cash Flow Management Basics• Cash Flow Statements and Projections –How are they different from Financial Statements?• Cash based, not Accrual based• Based on actual or expected timing of Cashinflows and outflows• Shows when Cash is available or will be needed
15Cash Flow Management Basics• The Cash Cycle –• Cash On Hand• Purchase Inventory and Supplies• Payment of Expenses• Accounts Payable, where Suppliers finance youuntil you pay them• Accounts Receivable, where you finance yourCustomers until they pay you• Back to Cash
16Cash Flow Management Basics• The Cash Cycle – each segment represents time• You need to understand how this cycle works for yourbusiness, and how to manage it – it is the heart ofyour Cash Flow Management plan• Extreme examples – Hair Salon and Book PublishingThe CashCycle may befast or slowdepending onyour business
17Cash Flow Management Basics• Some examples may help to illustrate - #1Business Start Up June 1:• Receive Loan of $5,000• Purchase Camera for $1,500 ; Computer for $1,000; and$500 of supplies – total $3,000• Remaining Cash balance of $2,000• First Customer: I land a $500 project , with work to becompleted by June 10, but I will not get paid until June 30• Project completion requires $100 of my supplies• $400 Net Profit. Sweet!
19Cash Flow vs. AccountingAccounting - Financial StatementsDate Revenue Expenses IncomeJune1- - -June10$500 $100 $400June30- - -• The Income Statement records the ‘Activity’ andcaptures, or ‘accrues’ it, when it occurs.• Not dependent on timing of the actual Cash in or out
20Date Cash In Cash Out Cash BalanceJune 1 $5,000 $3,000 $2,000June 10 - - $2,000June 30 $500 $2,500Cash Flow vs. AccountingCash Flow• The $100 of supplies was paid for June 1 so there is nochange to Cash when I do the job• I receive the Cash payment on June 30 even though Iearned it June 10 when I did the job• Key point is – the Timing of Cash Inflows and Outflows
21Cash Flow Management Basics• Some examples may help to illustrate - #2Business Start Up June 1:• Receive Loan of $3,000• Purchase Camera for $1,500 ; Computer for $1,000;and $500 of supplies – total $3,000• Remaining Cash balance of $0• First Customer: I land a $1,000 project , with work tobe completed by June 10, but I will not get paid untilJune 30• Project completion requires $250 of my supplies;and I have to pay a $250 studio fee, upfront.• $500 Net Profit. Sweet!
23Cash Flow vs. AccountingAccounting - Financial StatementsDate Revenue Expenses IncomeJune1- - -June10$1,000 $500 $500June30- - -• The Income Statement records the ‘Activity’ andcaptures, or ‘accrues it’, when it occurs.• Not dependent on timing of the actual Cash in or out
24Date Cash In Cash Out Cash BalanceJune 1 Loan $3,000June 1 Purchases $3,000 $0June 5 Studio Fee $250 ($250)June 10 Nothing - - ($250)June 30 Collect $1,000 $750Cash Flow vs. AccountingCash Flow• The job would be profitable but I won’t have the cash topay the studio fee
25Cash Flow Management BasicsSo What Happened in #2?• Unanticipated Cash requirement arose• Profitable project but Cash shortfall• Common problem – not enough Cash tostart or keep the project goingSo What Do You Do?• Plan for Contingencies• Create a Cash buffer for unforeseen needsCash is King and Timing is Critical
26Cash Flow Management BasicsStarting Up• You will be learning from your first customers• Be flexible but stick to your plan• Carefully assess what is working and what is not
27Cash Flow Management BasicsCash Requirements Forecasting• Expenses are always more certain than Revenues, butbe very conservative with both so you don’t end upshort
28Cash Flow Management BasicsDebt Repayment and Operating Expenses• Plan to Pay Your Lender and Pay Your Expenses•Create a conservative Repayment Plan with yourLender that you can meet, even with delays in sales• Make sure that you provide for all your BusinessOperating Expenses and have a buffer forunanticipated requirements or delays
29Cash Flow Management BasicsDebt Repayment and Operating Expenses• Plan to Pay Yourself• Your loan is to support business growth but yourlender knows you need to support yourself• Plan to pay yourself very modestly and primarilyout of profits – and be upfront on this, no one likessurprises
30Cash Flow Management BasicsReceiving and Giving Credit Terms• As a new business, you will have to prove that you arecredit worthy - Expect and Plan that suppliers willinitially want cash• Work towards establishing credit by small steps• And be careful about who you extend credit to. Don’tbe afraid to ask for a deposit on work.
31Cash Flow Management BasicsRecord Keeping – Accuracy• Accurate invoicing is essential to avoid delays inpayments• Follow up on invoices is also essential to ensurethey have been received and are not disputed. Yourcustomers are managing their Cash as well
32Cash Flow Management BasicsCommunication• Always keep key stakeholders up to date on howyou are doing, especially your creditors – silence is ared flag• Don’t be afraid to ask for help• Ask for referrals and testimonials
33How Will You Measure Success?• Referral of new business?• Repeat business?• Meeting milestones e.g. loan repayments?• Personal feeling of accomplishment?
3430 Minute Workshop• Each person to introduce their ‘Business Idea’ totheir group and talk about their business planningthinking so far – 10 minutes each• Describe your Business Model; and identify yourkey assumptions and how you can test them• Group members to provide feedback on thepossible ‘Business Model’ elements to consider• How will you know how much Cash you will need?
My Contact Info -Rob Coatsworthrobertcoatsworth@sympatico.ca416 725 497235Thank You andGood Luck!