The document discusses how revenue and costs translate into cash flows for a business. It explains that if customers pay instantly and suppliers are paid instantly, revenue and costs directly translate to cash. However, if customers pay in 30 days and suppliers are paid in 30 days, accounts receivable and accounts payable increase, which affects cash flow. The operating working capital requirement is the profit tied up in the business during this period. It also discusses how changing the customer payment or supplier payment terms can impact cash flows and the cash conversion cycle.

1. Finance. Made Simple.
Lunch and Learn – Financial Management 101 - March 31, 2016
Fractal Labs LTD - Proprietary & Confidential

2. AGENDA.
Fractal Labs LTD - Proprietary & Confidential
1. Fractal Labs – the automated CFO
2. How revenue and costs become cash flows
3. Why operating working capital matters
4. How we can help
£

3. Intelligent automated
financial assistant
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PLATFORMS
Braintree, Shopify, + + +

4. BALANCE SHEETINCOME STATEMENT
CASH FLOW
STATEMENT
HOW REVENUE AND COSTS BECOME CASH FLOW.
Fractal Labs LTD - Proprietary & Confidential
CASH 10REVENUE 100
COST (90)
PROFIT 10 RETAINED EARNINGS 10
CUSTOMERS PAY DAY
1SUPPLIERS ARE PAID DAY 1
CASH
AVAILABLE / (REQUIRED)
DAY 1 to 30
PROFIT 10
CASH 10
1
For simplicity, we’re now only looking at
operations, assuming no additional
investments or financing.

5. BALANCE SHEETINCOME STATEMENT
CASH FLOW
STATEMENT
HOW REVENUE AND COSTS BECOME CASH FLOW.
Fractal Labs LTD - Proprietary & Confidential
CASH 10REVENUE 100
COST (90)
PROFIT 10 RETAINED EARNINGS 10
CUSTOMERS PAY DAY
1SUPPLIERS ARE PAID DAY 1
CASH
AVAILABLE / (REQUIRED)
DAY 1 to 30
PROFIT 10
CASH 10
1
If customers pay instantly and you
pay suppliers instantly, revenue
and costs translate directly into
cash

6. BALANCE SHEETINCOME STATEMENT
CASH FLOW
STATEMENT
HOW REVENUE AND COSTS BECOME CASH FLOW.
Fractal Labs LTD - Proprietary & Confidential
CASH 10REVENUE 100
COST (90)
PROFIT 10 RETAINED EARNINGS 10
CUSTOMERS PAY DAY
1SUPPLIERS ARE PAID DAY 1
CASH
AVAILABLE / (REQUIRED)
DAY 1 to 30
PROFIT 10
CASH 10
1
If customers pay instantly and you
pay suppliers instantly, revenue
and costs translate directly into
cash
100-90 = 10 and the BS balances.

7. HOW REVENUE AND COSTS BECOME CASH FLOW.
Fractal Labs LTD - Proprietary & Confidential
INCOME STATEMENT BALANCE SHEET
CASH FLOW
STATEMENT
ACC. RECEIVABLE 100
ACC. PAYABLE 90
CHANGE ACC. REC.
(100)
CHANGE ACC. PAY. 90
CUSTOMERS PAY DAY 30
SUPPLIERS ARE PAID DAY
30
CASH 0REVENUE 100
COST (90)
PROFIT 10 RETAINED EARNINGS 10
PROFIT 10
CASH 0
CASH
AVAILABLE / (REQUIRED)
DAY 1 to 29
2
However, if you pay suppliers in
30 days and your customers pay
you in 30 days, things look
different

8. HOW REVENUE AND COSTS BECOME CASH FLOW.
Fractal Labs LTD - Proprietary & Confidential
INCOME STATEMENT BALANCE SHEET
CASH FLOW
STATEMENT
ACC. RECEIVABLE 100
ACC. PAYABLE 90
CHANGE ACC. REC.
(100)
CHANGE ACC. PAY. 90
CUSTOMERS PAY DAY 30
SUPPLIERS ARE PAID DAY
30
CASH 0REVENUE 100
COST (90)
PROFIT 10 RETAINED EARNINGS 10
PROFIT 10
CASH 0
CASH
AVAILABLE / (REQUIRED)
DAY 1 to 29
2
AR increases and AP increases.
Changes need to be accounted for
in the CF since the actual cash
received won’t be the same as the
profit anymore.

9. HOW REVENUE AND COSTS BECOME CASH FLOW.
Fractal Labs LTD - Proprietary & Confidential
INCOME STATEMENT BALANCE SHEET
CASH FLOW
STATEMENT
ACC. RECEIVABLE 100
ACC. PAYABLE 90
CHANGE ACC. REC.
(100)
CHANGE ACC. PAY. 90
CUSTOMERS PAY DAY 30
SUPPLIERS ARE PAID DAY
30
CASH 0REVENUE 100
COST (90)
PROFIT 10 RETAINED EARNINGS 10
PROFIT 10
CASH 0
CASH
AVAILABLE / (REQUIRED)
DAY 1 to 29
2
Your profit is tied up in the
business, or, your operating
working capital requirement
during this period is 10.
On day 30 you will get paid and
suppliers need to get paid

10. HOW REVENUE AND COSTS BECOME CASH FLOW.
Fractal Labs LTD - Proprietary & Confidential
INCOME STATEMENT BALANCE SHEET
CASH FLOW
STATEMENT
ACC. RECEIVABLE 100
ACC. PAYABLE 90
CHANGE ACC. REC.
(100)
CHANGE ACC. PAY. 90
CUSTOMERS PAY DAY 30
SUPPLIERS ARE PAID DAY
30
CASH 0REVENUE 100
COST (90)
PROFIT 10 RETAINED EARNINGS 10
PROFIT 10
CASH 0
CASH
AVAILABLE / (REQUIRED)
DAY 1 to 29
2
AR will decrease by 100 as
customers pay and AP will
decrease by 90 when you pay
suppliers.
Net cash flow for the full
month (30 days) will be 10.

11. Fractal Labs LTD - Proprietary & Confidential
CUSTOMERS PAY DAY 30
SUPPLIERS ARE PAID DAY 1
INCOME STATEMENT BALANCE SHEET
CASH FLOW
STATEMENT
ACC. RECEIVABLE 100
ACC. PAYABLE 0
CHANGE ACC. REC.
(100)
CHANGE ACC. PAY. 0
CASH (90)REVENUE 100
COST (90)
PROFIT 10 RETAINED EARNINGS 10
PROFIT 10
CASH (90)
CASH
AVAILABLE / (REQUIRED)
DAY 1 to 29
3
HOW REVENUE AND COSTS BECOME CASH FLOW.
Imagine if you would need to
pay your suppliers up front
instead

12. Fractal Labs LTD - Proprietary & Confidential
CUSTOMERS PAY DAY 30
SUPPLIERS ARE PAID DAY 1
INCOME STATEMENT BALANCE SHEET
CASH FLOW
STATEMENT
ACC. RECEIVABLE 100
ACC. PAYABLE 0
CHANGE ACC. REC.
(100)
CHANGE ACC. PAY. 0
CASH (90)REVENUE 100
COST (90)
PROFIT 10 RETAINED EARNINGS 10
PROFIT 10
CASH (90)
CASH
AVAILABLE / (REQUIRED)
DAY 1 to 29
3
HOW REVENUE AND COSTS BECOME CASH FLOW.
On day 1 you would need to
have enough cash to be able
to pay suppliers 90

13. Fractal Labs LTD - Proprietary & Confidential
CUSTOMERS PAY DAY 30
SUPPLIERS ARE PAID DAY 1
INCOME STATEMENT BALANCE SHEET
CASH FLOW
STATEMENT
ACC. RECEIVABLE 100
ACC. PAYABLE 0
CHANGE ACC. REC.
(100)
CHANGE ACC. PAY. 0
CASH (90)REVENUE 100
COST (90)
PROFIT 10 RETAINED EARNINGS 10
PROFIT 10
CASH (90)
CASH
AVAILABLE / (REQUIRED)
DAY 1 to 29
3
HOW REVENUE AND COSTS BECOME CASH FLOW.
AR would be 100 and AP
would be 0.

14. Fractal Labs LTD - Proprietary & Confidential
CUSTOMERS PAY DAY 30
SUPPLIERS ARE PAID DAY 1
INCOME STATEMENT BALANCE SHEET
CASH FLOW
STATEMENT
ACC. RECEIVABLE 100
ACC. PAYABLE 0
CHANGE ACC. REC.
(100)
CHANGE ACC. PAY. 0
CASH (90)REVENUE 100
COST (90)
PROFIT 10 RETAINED EARNINGS 10
PROFIT 10
CASH (90)
CASH
AVAILABLE / (REQUIRED)
DAY 1 to 29
3
HOW REVENUE AND COSTS BECOME CASH FLOW.
Operating
Working Capital
requirement
would be 100.
More money will be tied up
in the business

15. WHY OPERATING WORKING CAPITAL MATTERS.
Fractal Labs LTD - Proprietary & Confidential
BALANCE SHEET
ACC. RECEIVABLE 100
ACC. PAYABLE 90
CASH 0
RETAINED EARNINGS 10
OPERATING CURRENT ASSETS
(Accounts Receivable, Inventory, Prepayments, Tax Assets)
LESS
OPERATING CURRENT LIABILITIES
(Accounts Payable, Accruals, Deferred Income, Tax Liabilities)
BALANCE SHEET
CASH 10
RETAINED EARNINGS 10
BALANCE SHEET
ACC. RECEIVABLE 100
ACC. PAYABLE 0
CASH (90)
RETAINED EARNINGS 10
= 0 = 10 = 100
1 2 3

16. CASH FLOWS
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
WHY OPERATING WORKING CAPITAL MATTERS.
Fractal Labs LTD - Proprietary & Confidential
= 0 = 10 = 100
1 2 3
100
(90)
10
100
(90)
10
CASH FLOWS
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
100
(90)
10
CASH FLOWS
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)

17. CASH FLOWS
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
WHY OPERATING WORKING CAPITAL MATTERS.
Fractal Labs LTD - Proprietary & Confidential
= 0
1
100
(90)
10
Example 1: If you receive all your income
up front, and you pay suppliers
immediately, your cash flow on day 1 =
profit. OWC requirement is 0.

18. WHY OPERATING WORKING CAPITAL MATTERS.
Fractal Labs LTD - Proprietary & Confidential
= 10
2
100
(90)
10
CASH FLOWS
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
Example 2: If you receive
income in 30 days and pay
suppliers in 30 days, your
OWC requirement is 10 (you
have to wait for your profit).

19. WHY OPERATING WORKING CAPITAL MATTERS.
Fractal Labs LTD - Proprietary & Confidential
= 100
3
100
(90)
10
CASH FLOWS
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
Example 3: If you have to pay suppliers up front,
but only receive income in 30 days, your cash flow
on day one = your costs, and your CF day 30 =
revenue. OWC is 100, as you need to pay 90 to
suppliers and wait for your profit of 10.

20. WHY OPERATING WORKING CAPITAL MATTERS.
Fractal Labs LTD - Proprietary & Confidential
= 100
3
100
(90)
10
CASH FLOWS
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
Example 3: If you have to pay suppliers up front,
but only receive income in 30 days, your cash flow
on day one = your costs, and your CF day 30 =
revenue. OWC is 100, as you need to pay 90 to
suppliers and wait for your profit of 10.
For the full month, the net cash flow is the same
(the profit), but the timing of your cash out flows and
inflows are very different.
This brings us to the importance of the Cash
Conversion Cycle.

21. WHY CASH CONVERSION CYCLE MATTERS.
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100
(90)
10
= 0 days = 0 days = 30 days
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
1 2 3
CASH FLOWS
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
100
(90)
10
CASH FLOWS
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
100
(90)
10
CASH FLOWS
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)

22. WHY CASH CONVERSION CYCLE MATTERS.
Fractal Labs LTD - Proprietary & Confidential
100
(90)
10
= 0 days = 0 days = 30 days
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
1 2 3
CASH FLOWS
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
100
(90)
10
CASH FLOWS
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
100
(90)
10
CASH FLOWS
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
How many days it takes to convert your profit into cash from the moment you pay your first cost.
Defined as Days Receivables – Days Payables

23. 100
(90)
10
CASH FLOWS
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
WHY OPERATING WORKING CAPITAL MATTERS.
Fractal Labs LTD - Proprietary & Confidential
3
INCREASING DAYS PAYABLE:
CUSTOMERS PAY DAY 30
SUPPLIERS ARE PAID DAY 20 100
(90)
10
CASH FLOWS
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
MINIMUM
CASH
To reduce this conversion time, Days Rec can be reduced or
Days Pay increased.

24. 100
(90)
10
CASH FLOWS
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
WHY OPERATING WORKING CAPITAL MATTERS.
Fractal Labs LTD - Proprietary & Confidential
= 10 days
3
INCREASING DAYS PAYABLE:
CUSTOMERS PAY DAY 30
SUPPLIERS ARE PAID DAY 20 100
(90)
10
CASH FLOWS
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
MINIMUM
CASH
To reduce this conversion time, Days Rec can be reduced or
Days Pay increased.
If Days Pay are increased to 20, CCC will be 10. (30 – 20).

25. 100
(90)
10
CASH FLOWS
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
WHY OPERATING WORKING CAPITAL MATTERS.
Fractal Labs LTD - Proprietary & Confidential
= 10 days
3
INCREASING DAYS PAYABLE:
CUSTOMERS PAY DAY 30
SUPPLIERS ARE PAID DAY 20 100
(90)
10
CASH FLOWS
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
MINIMUM
CASH
To reduce this conversion time, Days Rec can be reduced or
Days Pay increased.
If Days Pay are increased to 20, CCC will be 10. (30 – 20).
The suppliers will need to get paid in day 20, which reduces
the average amount of working capital needed for the
month.

26. 100
(90)
10
CASH FLOWS
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
WHY OPERATING WORKING CAPITAL MATTERS.
Fractal Labs LTD - Proprietary & Confidential
= 10 days
3
INCREASING DAYS PAYABLE:
CUSTOMERS PAY DAY 30
SUPPLIERS ARE PAID DAY 20
AVERAGE OPERATING WORKING CAPITAL:
AVERAGE ACCOUNTS RECEIVABLE = 100
LESS
AVERAGE ACCOUNTS PAYABLE = 90*(20/30)=60
= 40
100
(90)
10
CASH FLOWS
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
MINIMUM
CASH

27. 100
(90)
10
CASH FLOWS
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
WHY OPERATING WORKING CAPITAL MATTERS.
Fractal Labs LTD - Proprietary & Confidential
= 10 days
3
INCREASING DAYS PAYABLE:
CUSTOMERS PAY DAY 30
SUPPLIERS ARE PAID DAY 20
AVERAGE OPERATING WORKING CAPITAL:
AVERAGE ACCOUNTS RECEIVABLE = 100
LESS
AVERAGE ACCOUNTS PAYABLE = 90*(20/30)=60
= 40
100
(90)
10
CASH FLOWS
2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
100
80
60
40
20
0
(20)
(40)
(60)
(80)
(100)
MINIMUM
CASH
the minimum cash
balance on day 20 will
need to be 90 in order
for the business to
survive.

28. HOW CAN WE HELP?
Fractal Labs LTD - Proprietary & Confidential
AUTOMATED ALERTS
BUDGET vs ACTUALS
CASH ANALYSIS
REPORTS

29. THANK YOU
Lunch and Learn – Financial Management 101 – March 31, 2016
Fractal Labs LTD - Proprietary & Confidential