This presentation is ‘for profit’ organizations only. Almost all experiences are from Indian organizations.

1. © 2020 TOCICO. All Rights Reserved.
Presented by:
KEYNOTE PRESENTATION
TOCICO 2020 CONFERENCE
Cash Crisis with Covid-19 and What to do
& What Not To Do
Ravi Gilani, Founder &
Managing Consultant
Goldratt India

2. Disclaimer
• This presentation is ‘for profit’
organizations only
• Almost all experiences are from Indian
organizations

3. Agenda
• Organisational Goal
• Typical Goal measurements
• Current pains with COVID-19
• Measurements purpose
• TOC Measurements & its relationship with conventional
financial measurements
• Free Cash Flow & its elements
• What not to do when in cash constraint
• What to do in cash constraint situation
• Summary

4. Organizational Goal
• Organizational Goal: 4M-Make More & More Money
• 4 M is totally aligned with customer satisfaction &
employee satisfaction

5. Typical Goal Measurements
• Growth in sales
• Growth in EBIDTA (Earnings before interest,
depreciation, amortization, and tax)
• Profit
• Growth in profits
• Return on investment or Return on capital employed
(ROCE)
• Free cash flow (FCF)

6. Current Pains with COVID-19
• Sales volumes dropped very significantly if not zero
• Huge losses / profits not there / profits shrunk
significantly
• Unable to keep financial commitments to banks,
vendors, employees etc.
• Why?
• No cash reserves! Why no cash reserves?
• Is COVID-19 responsible for not keeping adequate cash
reserves? It just exposed the soft underbelly!

7. Measurements purpose
• The only purpose of any measurement is to help take
decision for corrective action!
• Do the current conventional measurements (Profit,
ROCE, FCF) help us take right decisions or take
corrective actions?
• Though FCF is a very good financial measurement, it
does not get due importance in a plethora of financial
measurements!

8. Flow of Money
-
-
OE 30
PVC
60
I 300
+ S 100
Cash in bank
8

9. TOC Measurements
• Throughput (T), Investment (I), & Operating Expenses
(OE)
• Throughput (T) is the rate of contribution over a period of
time = Net sales less all Pure Variable Cost (PVC) over a
period of time
• Investment (I) is all the organizational money blocked in
the system that cannot be en-cashed quickly
• Operating Expenses (OE) are all those expenses that
will be incurred even with zero sales and nil production

10. TOC Measurements & its relationship with
conventional financial measurements
• Profit (P) = Sales –all expenses = Sales-PVC-OE
=(Sales-PVC)-OE = T-OE
• ROI = P/I = (T-OE)/I
• FCF = P –ΔI

11. Free Cash Flow & its elements
• FCF = P –ΔI
• FCF = T-OE - ΔI
• Δ I = Δ Capital investment + Δ accounts receivables
+ Δ inventories – Δ payables
• FCF ~ T-OE - Δ accounts receivables - Δ inventories + Δ
payables
• Actions to increase FCF are
– Increase T, reduce OE, reduce accounts receivables, reduce inventories,
increase payables

12. Parameter 1 2 3 4 5 6
Money opening 100 100 100 100 100 100
OE 50 50 50 50 50 50
Money available for material
purchase
50 50 50 50 50 50
Material purchased/ PVC 50 50 50 50 50 50
Sales 100 100 100 100 100 100
Throughput 50 50 50 50 50 50
Money closing 100 100 100 100 100 100
Capacity utilization 50% 50% 50% 50% 50% 50%
Cash Precariously Balanced
12

13. Parameter 1 2 3 4 5 6
Money opening 100 90 80 60 20 NIL
OE 50 50 50 50 50
Money available for material
purchase
50 40 30 10 NIL
Material purchased/ PVC 50 40 30 10 NIL
Sales 100 80 60 20 NIL
Throughput 50 40 30 10 NIL
Money closing 90 80 60 20 NIL
Capacity utilization 50% 40% 30% 10% 0%
Cash – a small reduction
13

14. Parameter 1 2 3 4 5 6
Money opening 100 110 120 140 180 230
OE 50 50 50 50 50 50
Money available for material
purchase
50 60 70 90 130 180
Material purchased/ PVC 50 60 70 90 100 100
Sales 100 120 140 180 200 200
Throughput 50 60 70 90 100 100
Money closing 110 120 140 180 230 280
Capacity utilization 50% 60% 70% 90% 100% 100%
Cash – a small increase
14

15. Cash velocity for better decision making
• When cash is the constraint, a small increase or decrease has a non
linear impact on sales, throughput, profit, and free cash flow
• Cash velocity is defined as increase in cash flow per unit of cash per
unit of time
• Higher the cash velocity the better is the cash flow for the
organization
• Cash velocity is = (S/PVC)^(1/N)-1, S = sales, PVC is pure variable
cost, N is cash to cash cycle time in months
• Cash velocity is not the Goal of the organization. It is a tool for
better decision making for increasing the Goal achievement

16. What Not To Do In Cash Constraint
• Do not lay off people
• Stop measuring efficiency parameters
• Stop measuring sales turnover in currency or numbers of units
• Stop measuring EBIDTA, PBT, PAT, ROCE etc.
• Stop taking large customer orders.
• Stop buying large quantities for availing quantity discount & saving
freight cost
• Do not reduce expenses on tea, coffee, etc.

17. What To Do In Cash Constraint
• Start measuring dispersible cash in the bank & free cash flow on
daily / weekly frequency
• Allocate cash with highest priority to highest cash velocity
business lines / product families
• Use cash velocity for taking decisions on accepting customer
orders, vendor selection, transportation mode etc.
• Reduce cash to cash cycle time through faster collection of
accounts payable even at significant cash discount, increase
credit terms with suppliers even at a higher prices if required
• Reduce RM inventories with smaller minimum order quantity
(MOQ)

18. What To Do In Cash Constraint
• Reduce WIP & FG through TOC Production Solution DBR (Drum-
Buffer-Rope)
• Pay small vendors for packing materials, transporters, freight
forwarders etc. absolutely on time
• Keep all your financial commitments. If you are unable to pay the
entire overdue amount, make commitment for a small amount but
always honor the commitment
• Break large customer orders into small lot orders in consultation with
customers

19. What To Do In Cash Constraint
• Convert OE into pure variable cost wherever possible
• Explore possibility of having people on retainer ship for reduced time
instead of full time employment
• Reduce salaries of senior, and middle management people
significantly
• Renegotiate OE expenses like rent etc.
• Allocate available cash as protective resource-1/3 for employees, 1/3
for shareholders, & 1/3 for deployement for business

20. Summary
• Organizational Goal - 4M: More & More Money in the bank
• Use T,I, OE, & Cash velocity for decision making
• Focus on increasing cash flow rather than sales, profit or even
throughput
• Keep Cash as protective resource for employees, shareholders,
and business
• Shrink cash to cash cycle time through reduction in inventories,
account receivables, and increased credit times
• Do not lay off employees. If required introduce salary cuts higher at
senior levels, and lesser at middle levels
• There is no shortage of cash in the world. There is only
shortage of trust in the world both in self as well as in others!

21. Ravi Gilani
Ravi Gilani, Founder and Managing
Consultant of Goldratt India, introduced
TOC in India in 1998. He helps
organizations increase their Cash in the
bank by simplifying measurements.
He enjoys striving for the impossible by
challenging sacred assumptions and
simplifying complexity.
In the past Ravi also served on the the
board of TOCICO. He enjoys sharing
his TOC journey with a regular column
for India’s premier business magazine,
Outlook Business. ravigilani@goldrattindia.com