This document discusses the differences between profit and cash flow for businesses and the importance of adequate funding. It notes that while profit shows what is earned, cash flow shows actual payments and receipts, and there can be a gap between the two. The document advises businesses to understand their funding requirements through forecasts and look to match these with appropriate funding sources like debt, equity or grants. It also discusses being "investment ready" by having a strong business case and being compliant with legal requirements in order to attract financing.

1. Cash
Including some forgotten truths…
Richard Wadman, Director
Francis Clark LLP with Winter Rule

2. Cash - presentation
• “Cash is the lifeblood of a
business”
– Cash v Profit
– “Mind the gap”
– Funding sources
– Investment readiness
• Q&A

3. Cash is the lifeblood of business
– Chelsea
announce
£67.7million
loss (By MirrorFootball,
31/01/12)

4. But at some stage profit (surplus) is required?
“UK Total Government Debt for
end FY 2012: £1.046 trillion”

5. Cash v Profit
• A profitable first £ £
year…
Turnover 150,000
Cost of sales 50% (75,000)
Gross Profit 75,000
Overheads
Wages (20,000)
Premises (5,000)
Other (10,000)
Depreciation (10,000)
(45,000)
Net profit 30,000

6. Cash v Profit
• But no cash… £ £
Fixed Assets (Note 1) 40,000
Debtors 30,000
Stock 15,000
Prepayments 5,000
50,000
Bank overdraft (60,000)
(10,000)
Net Assets 30,000
1. Plant and machinery, fixtures etc

7. Cash v Profit
• How?
£
Profit 30,000
Depreciation 10,000
40,000
Working capital (50,000)
(stock, debtors and prepayments)
Fixed asset expenditure (50,000)
Cash deficit (60,000)

8. Cash v profit
• Profit and loss shows profit generated in a period.
E.g.,
– Revenue recognised when earned (sale made)
– Costs recognised against revenue and/ or time
• Cash flow based on cash payments and receipts

9. Cash v Profit
• ‘Accounting concepts’ to give us
‘profit for the period’
– Depreciation
– Debtors
– Stock
– Prepayments

10. ‘Mind the gap’
• Understand difference b/w
cash and profit
• Understand ‘value’ of the
balance sheet
• Project forward
– Cash requirement?

11. Mind the gap
• Is £60k the worse
position?
• Timing is
everything…

12. Mind the gap
• The worse £
position? Opening cash 0
– Assume capital Fixed asset expenditure (60,000)
expenditure and
Stock (initial), say (30,000)
stock paid for in
advance of sales Wages, say 3 months (5,000)
– Say 3 months to Other costs, say 3 months (2,500)
get ‘set up’
Rent, prepayment (6,000)
– Rent prepayment
Cash deficit (103,500)
Note: VAT at 20% assumed on expenditure (exc wages)

13. Mind the Gap
• Identifying ‘cash requirement’
– Monthly profit and loss, cash flow and balance sheet
forecasts
– Do not forget about profit v cash
– Do not forget about tax (VAT and tax on profits)

14. Funding
• Match funding requirement to funds sought
– “Clearly, Northern Rock's reliance on wholesale
funding, and the 'borrow short, lend long' approach to
managing its business risks, were both huge risks.”
(http://openlearn.open.ac.uk/mod/oucontent/view.php?id=401804&section=4.2)
• Funding types (general)
– Grant
– Debt (overdraft to term loans and mortgages)
– Equity

15. Funding
• Debt
– Interest and capital
– Term or repayable or demand
– Secured or unsecured
– Asset Finance
– Invoice Discounting
– Government initiatives to stimulate bank lending
• Enterprise Finance Guarantee Scheme, National Loan Guarantee
Scheme, “Funding for Lending” (part of £140bn)
– Bank lending to UK businesses falling…

16. Funding
• “It’s an equity proposition” – 2007/08 onwards
• Equity
– Share in risks and rewards/ Part owners
– “Family, Friends and Fools” through to Private Equity
– “Government” stimuli
• Business Angels – EIS/ SEIS
• Venture Capital – Business Growth Fund
– Virtual networks – e.g., Crowdcube
– Angel networks – SWAIN and GAIN

17. Grants
• Non-repayable finance
• Cornwall has grant funding – see hand-out
• Some national schemes “in funds”
• Not all businesses eligible

18. Investment ready
Understand
funding
Understand
options
your
available and
requirements
funders
requirements

19. Investment ready - general
• Business Case to the fore
– Business Plan and Financial Projections
– Team: ability to deliver
– Market research
– ‘Route to Market’
– Why you are going succeed (acknowledge risks as well?)
• Compliance and Legal
– VAT, PAYE/NI, Books and records
– IPR ownership etc.

20. Investment ready – a few specifics
• Debt
– Ability to repay
– Security
• Equity
– Value
– Exit route?
• Grant
– Eligibility

21. Summary
• A sustainable business delivers profit
– But profit does not equal cash
• To survive that business must be
adequately funded
– Understand financing requirements
and look to match with funding
• There is a ‘tax tale’ but that is for
another day…
– plus is carbon the future currency?

22. Questions
•Q&A