The document provides an overview of company cash flow and working capital management concepts. It defines key terms like assets, liabilities, equity, liquidity, working capital, and cash flow. It discusses calculating and managing optimum working capital levels. Tips are provided for improving cash flow through accounts receivable, accounts payable, and inventory management. Cash budgeting and cash flow controlling indices like leverage and working capital ratios are also summarized.

1. Company Cash Flow
(Financing Basics for Engineers)
By
Moustafa M. Elsayed
Professor & Consultant
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2. • Arabic Terminology
• Assets & Liabilities
• Equity
• Liquidity and Solvency
• Working Capital
• Working Capital Management
• Optimum Working Capital
• Cash Management Overview
• Cash Budget
• Hints for Improving Cash flow
• Cash Flow Controlling Indices
• Examples
• Discussion
Contents
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3. Term Arabic Term Term Arabic Term
Asset ‫أصول‬ Working Capital ‫العامل‬ ‫المال‬ ‫راس‬
Fixed Asset ‫ثابتة‬ ‫أصول‬ Cash Flow ‫التدفق‬‫المالي‬
Current Asset ‫متداولة‬ ‫أصول‬ Accounts
Receivable
‫العمالء‬ ‫حسابات‬
Liability ‫الخصوم‬ Accounts
Payable
‫الموردين‬ ‫حسابات‬
Current Liability ‫المتداولة‬ ‫الخصوم‬
Long Term
Liability
‫المدى‬ ‫طويلة‬ ‫الخصوم‬
Equity ‫الملكية‬ ‫حقوق‬
Liquidity ‫السيولة‬
Solvency ‫المالية‬ ‫المالءة‬
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Arabic Terminology
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4. • An asset is any resource owned by the business.
• Simply stated, assets represent value of ownership that can be
converted into cash
Assets and Liabilities
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5. Assets and Liabilities
• A liability is defined as the future sacrifices of economic
benefits that the entity is obliged to make to other entities as a
result of past transactions or other past events.
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6. Assets and Liabilities
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7. Assets and Liabilities
Current Assets
• Current assets represent all the assets of a company that are
expected to be conveniently sold, consumed, utilized or
exhausted through the standard business operations, which
can lead to their conversion to a cash value over the next one
year period.
• Current assets include cash, cash equivalents, accounts
receivable, stock inventory, marketable securities, pre-paid
liabilities, and other liquid assets.
• Current assets are important to businesses because they can
be used to fund day-to-day business operations and to pay for
ongoing operating expenses.
• Since the term is reported as a dollar value of all the assets and
resources that can be easily converted to cash in a short period
of time, it also represents a company’s liquid assets.
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8. Assets and Liabilities
Current Liabilities
• Current liabilities are a company's debts or obligations that are
due within one year or within a normal operating cycle.
• Furthermore, current liabilities are settled by the use of a
current asset, such as cash, or by creating a new current
liability.
• Current liabilities appear on a company's balance sheet and
include short-term debt, accounts payable, accrued liabilities,
and other similar debts.
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9. Equity
• Equity are the assets that remain available for the owners after
all financial obligations have been paid. ...
• Equity is the shareholders capital invested in the Company
and is part of total liability of the Company.
• Equity is the value of an asset less the value of all liabilities on
that asset.
Equity
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10. • Liquidity is firm’s ability to
meet its short term obligation.
• Solvency is the ability of a
company to meet its long-term
debts and financial obligations.
• Solvency is essential to staying
in business as it demonstrates
a company’s ability to continue
operations into the foreseeable
future.
• Liquidity is needed to thrive
and pay off short-term
obligations.
• A company that is insolvent
will often enter bankruptcy.
Liquidity and Solvency
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11. Working Capital
• Working capital represents
operating liquidity available to
a business.
• Working capital, also known as
net working capital (NWC), is
the difference between a
company’s current assets
and its current liabilities.
• Working capital is a measure
of a company’s liquidity,
operational efficiency and its
short-term financial health
Working Capital
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Working Capital = Current Assets – Current Liabilities

12. Working Capital
Working Capital
• If a company has
substantial working
capital, then it should have
the potential to invest and
grow.
• If a company's current
assets do not exceed its
current liabilities, then it
may have trouble growing
or paying back creditors, or
even go bankrupt.
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13. Working Capital
• The amount of working capital a small business needs to run
smoothly depends largely on the type of business, its operating
cycle and the business owners' goals for future growth.
• However, while very large businesses can get by with negative
working capital because of their ability to raise funds quickly,
small businesses should maintain positive working capital
figures.
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14. • This is management of CA (Current Assets) as well as CL (Current
Liabilities).
• If current assets are less than current liabilities, an entity has a
working capital deficiency, also called a working capital deficit.
Working Capital Management
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15. Working Capital Management
• The fundamental principles of
working capital management
are reducing the capital
employed and improving
efficiency in the areas of
receivables, inventories, and
payables.
• When trying to attain greater
efficiency, it is important not to
focus exclusively on income and
expense items, but to also take
into account the capital
structure, whose improvement
can free up valuable financial
resources
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16. Working Capital Management
• Benefit of low working capital
• Money otherwise tied up in
current assets can be
invested in activities that
generate higher payoff
• Reduces need for costly
financing
• Cost of low working capital
• Risk of shortages in cash,
inventory
• Difficulties in operation
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High or Low Working Capital

17. Working Capital Management
Permanent & Temporary Working Capital
• Permanent working capital should be financed with long-term
sources, such as long-term debt and/or equity.
• Temporary (seasonal) should be financed with short-term
borrowing
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18. Working Capital Management
Working Capital Financing Policies
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Conservative Policy
Use Long Term Resources
Aggressive Policy
Use Short Term Resources
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19. • Working Capital = Current Assets –
Current Liabilities
• The optimum amount of working
capital theoretically would be zero.
• If a company could structure its
finances so that the liquidity risk were
somehow reduced to zero, there
would be no need for working capital.
• The fact remains that working capital
is needed to meet current obligations.
• How much working capital does a
business need to account for the
liquidity risk, but at the same time,
not invest excess funds in the
process?
Optimum Working Capital
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Minimum Working Capital

20. • AR TOD = 365 X AR/ Revenue
• Inventory TOD = 365 X Inventory / Cost of Revenue
• AP TOD = 365 X AP / Cost of Revenue
• Asset Conversion Days = ACD
= AR TOD + Inventory TOD – AP TOD
• Daily Sales = DS = Revenue / 365
• Minimum Working Capital = ACD X DS
Example To Calculate Min WC
Optimum Working Capital
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Turnover Days (TOD) Method
(How long does it take to convert AR and inventory, less AP, into cash)

21. • Common cause of business
failure: Cash crisis!
• A business can be earning a
profit and be forced to close
because it runs out of cash!
• National Federation of
Independent Business (NFIB)
study:
– 67% of small business
owners have at least
occasional problems
managing cash flow.
– 19% report cash flow as a
continuing problem.
Cash Management Overview
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Cash Management

22. Cash
Accounts Payable
Decrease in Cash
Cash Purchases
Inventory
Accounts Receivable
Cash Sales
Increase in Cash
Leakage
Leakage
Cash Management Overview
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Cash Flow Components

23. • Increase amount and
speed of cash flowing
into the company
• Reduce the amount and
speed of cash flowing
out
• Make the most efficient
use of available cash
• Finance seasonal
business needs
Cash Management Overview
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Benefits of Cash Management

24. • Determine a Minimum Cash
Balance
• Forecast Sales
• Forecast Cash Receipts
• Forecast Cash Disbursements
• Estimate End-of-Month Cash
Balance
Cash Budget
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Preparing a Cash Budget

25. Cash Budget
Causes of Cash Flow Problems
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26. Cash Budget
Causes of Cash Flow Problems In Small Business
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13.1%
15.4%
22.8%
29.7%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
Percent of Small Businesses
Weak sales
Unexpected variations in sales
Seasonal sales patterns
Difficulty collecting accounts
receivable
Causes of Cash Flow Problems in Small Businesses

27. Cash Budget
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28. 28
Accounts Receivable
• A sale is not a sale until you collect the
money.
• The goal is to collect your company’s cash as
fast as you can.
Account Payable
• Stretch out payment times as long as
possible without damaging your credit
rating.
• Verify all invoices before paying them.
Inventory
• Monitor it closely; it can drain a company’s
cash.
• Avoid inventory “overbuying.”
• Arrange for inventory deliveries at the latest
possible date.
Hints for Improving Cash flow

29. 29
Hints for Improving Cash flow

30. 28%
18% 18%
12%
11%
4%
0%
5%
10%
15%
20%
25%
30%
PercentageofSmallBusinessUsing
Investing personal
or private funds
Postponing
purchases
Obtaining a line of
credit
Using a credit card Using a short-term
loan
Leasing rather than
purchasing
Tactic
Coping with a Cash Crunch
Tactics Used by Small Businesses
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Hints for Improving Cash flow
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31. Cash Flow Controlling Indices
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32. Cash Flow Controlling Indices
Leverage Ratios
• This is any one of several
financial measurements that
look at how much capital comes
in the form of debt (loans) or
assesses the ability of a company
to meet its financial obligations.
• Common ratios include the debt-
equity ratio, equity multiplier,
degree of financial leverage, &
consumer leverage ratio.
• Banks have regulatory oversight
on the level of leverage they are
able to have, as measured by
leverage ratios.
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33. Cash Flow Controlling Indices
Debit to Equity Leverage Ratio
• Leverage ratio is used to
determine the relative level
of debt load that a
business has incurred.
• Construction firms use
construction loans to finance
most of their projects.
• Although this leads to a high
debt to equity ratio, the firm
is not at risk of insolvency.
• The owners of each
construction project are
essentially paying to service
the debt themselves.
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34. Cash Flow Controlling Indices
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35. Cash Flow Controlling Indices
• The debt-to-capital ratio is a
measurement of a company's
financial leverage.
• Debt includes all short-term
and long-term obligations.
• Capital includes the
company's debt and
shareholder's equity.
• This ratio is used to evaluate a
firm's financial structure and
how it's financing operations.
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• Typically, if a company has a
high debt-to-capital ratio
compared to its peers, then it
may have a higher default
risk due to the effect the debt
has on its operations.
Debt-to-Capital Ratio
Debt-to-Capital Ratio = Total Debt / Total Capital

36. Cash Flow Controlling Indices
The Equity Multiplier
• The equity multiplier is similar, but replaces debt with assets in
the numerator:
Equity Multiplier = (Total Assets) / (Total Equity)
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A lower equity multiplier
is preferred because it
indicates that the
company is taking on
less debt to buy assets.
In this case

37. Cash Flow Controlling Indices
Working Capital Ratios
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• Working Capital = Current Assets – Current Liabilities
• Current Ratio (CR) = Current Assets / Current Liabilities
• This ratio should be about 2 or more for safe and healthy
operation.
• As this ratio approaches one or less than 1, there will be strong
indicator that the company has a liquidity problem.
• Care must be given for cases with high value of CR because of
high inventory value. Could this inventory really be sold at
estimated value?
• Quick Ratio = (Current Assets – Inventory) / Current Liabilities
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38. Excel Sheet Examples
Examples
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39. Open
Discussion
Discussion
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