Presentation is loading. Please wait.

Presentation is loading. Please wait.

Confidential. Optimizing your cash flow during the downturn Alan Miltz Founding Director Inmatrix.

Similar presentations


Presentation on theme: "Confidential. Optimizing your cash flow during the downturn Alan Miltz Founding Director Inmatrix."— Presentation transcript:

1 confidential. Optimizing your cash flow during the downturn Alan Miltz Founding Director Inmatrix

2 confidential. Objectives How to conduct a financial health check How the banks would review your performance Techniques used by the best global companies to measure financial performance

3 confidential. Who am I? 12 years ago I co-founded Inmatrix. We developed Optimist as a standard communication between Accountants, Banks & Companies.

4 confidential. 22 Countries Accountants ‘000s of Companies+200 Banks

5 confidential. Gary’s Furniture B-91 Gary’s Furniture was founded in 2001 Gary is a furniture importer and manufacturer and distributes to 500 stores including majors and independents Gary believes he is doing fantastically We are going to use a case study based on a company Gary’s Furniture.

6 confidential. Gary’s Furniture

7 confidential. Gary’s Furniture On a scale of 1 to 10 how would you rate Gary's Furniture’s financial performance? On a Scale of 1 to 10 how do you think the Bank rates Gary's Furniture’s financial performance? What is Gary's cash flow for 2009?

8 confidential. The funnel analogy

9 confidential. Your company’s strategy Does your strategy give you a sustainable competitive advantage? (SCA) Your SCA should be a filtering mechanism when considering new opportunities. ( i.e. Will the new opportunity add value to your SCA?)

10 confidential. How does finance measure your SCA? Profit? Revenue Growth? Cash Flow? Market Share? Return? Dividends?

11 confidential. How does finance measure your SCA? Profit Revenue Growth Cash Flow Market Share Return Dividends

12 confidential. How do your accounts enable you to calculate these measures? Profit Revenue Growth Cash Flow Market Share Return Dividends

13 confidential. The accounting equation – the balance sheet

14 confidential. The management accounting equation – the balance sheet All funding is moved to the left hand side of the equation

15 confidential. The management accounting equation – the balance sheet

16 confidential. The balance sheet Funding (E +ND) Operations NOA

17 confidential. The balance sheet Rearrange the accounts of Gary’s Furniture.

18 confidential. Gary’s Furniture

19 confidential. Gary’s Furniture

20 confidential. The management accounting equation – the balance sheet

21 confidential. Why go into business? Return On Capital Employed(ROCE) OR Return On Net Assets(RONA) ROCE = RONA (The Dupont Theory of Financial Analysis)

22 confidential. Financial analysis – the theory Return on Capital Employed or Return on Net Assets or X EBIT Revenue Net Operating Assets OR ROCE = EBIT/Net Operating Assets

23 confidential. The ROCE equation As management it is mission critical that over time we ensure that our EBIT is growing at a faster rate than our investment in our Net Operating Assets. EBIT NOA

24 confidential. KEY POINTS  Clear understanding of what the business is doing  Which quadrant is the business in now, where is it heading and why?  What are the opportunities for the business?  What will the outcomes be for the business  There are options and the answer is ‘it depends’  This provides a powerful partnership tool Optimizing Growth 8m 7m 6m 5m 4m 3m 2m 1m 24m 25m 26m 27m 28m 29m EBIT A B C D E NET ASSETS Corporate stress? Fast growth? Declining Growth? Re-engineering Working Investment? Optimising growth?

25 confidential. Business Positioning

26 confidential. What return should we be getting? D + E = NOA What is the cost of debt = after tax cost of borrowing What is the cost of equity = Rf + (Beta x Mp) What is the weighted average cost of capital (WACC)

27 confidential. Equity is the most expensive source of funding Have you ever tried to get equity funding? Approx 2 to 5% of companies are successful in attaining equity finance What does an investor look for?

28 confidential. Obtaining Equity Finance A Prospective Investor will look at: Management Opportunities Valuation Exit Strategy ROI Is your Company a MOVER?

29 confidential. How do I understand my SCA? Marketing Operations Innovation HR Finance What are the 3 critical success factors for each of the above?

30 confidential. Does your business have an SCA?

31 confidential. Take my business I founded 11 years ago

32 confidential. Plotting your Critical Success Factors

33 confidential. Plotting your Critical Success Factors

34 confidential. Plotting your Critical Success Factors

35 confidential. Techniques to improve your ROCE and Cash Flow Marketing Operations Innovation HR

36 confidential. Marketing – understanding your customers Most companies operate under the 80/20 rule – 80% of their customers account for 20% of the revenue.

37 confidential. Who do we want to work with? We want a relationship We don’t want a relationship They want a relationship They don’t want a relationship

38 confidential. Blind spot? Common Knowledge Private Blind spot? Known to you Unknown to you Known by others Unknown by others

39 confidential. What do we do with the 3 and 4s? 12 We want a relationship We don’t want a relationship They want a relationship They don’t want a relationship

40 confidential. What do we do with the 1 and 2s? The goal is to identify your blind spots with your 1 and 2 clients and lock them into your business. Ask these key clients for a wish list (i.e. what do we need to do to at least be equal with your best supplier?) Provide these clients with your wish list (i.e. what we want from them) Document a supply chain agreement.

41 confidential. Operations – where are your overheads? We want a relationship We don’t want a relationship They want a relationship They don’t want a relationship

42 confidential. Who creates innovation? Once a week each staff member should provide one idea in writing on how to improve the business. This is called the 5:15 report.

43 confidential. The role of Finance Finance’s role is to measure your company from a business and banking perspective.

44 confidential. The Financial Health Check

45 confidential. The quality of your cash flow Cash Flow Funding Fixed Assets Working Capital Profit Next PeriodWeaknessStrengths impact on cash flow

46 confidential. For each measure let’s look at… ProfitabilityIdeal ProfileGAB Sales100 GM%30>3028 – 30<28 OH%20< 2020 – 22<22 EBIT%10>108 – 10<8 Working Capital AR Days60<6060 – 70>70 Inv/WIP Days90<9090 – 100>100 AP Days6045 – 6060 – Working Capital %22<2222 – 25>25

47 confidential. Gary’s numbers ProfitabilityIdeal ProfileGAB Sales100 GM%3031 OH%20 EBIT%1011 Working Capital AR Days6075 Inv/WIP Days90180 AP Days60(70) Working Capital%2241

48 confidential. The Power of One It is essential to know the cash flow sensitivities of a 1% or 1 day change in: Price % Volume % COGS % AR INV/WIP AP

49 confidential. The Power of One Why does an increase in sales volume reduce cash flow?

50 confidential. The Power of One - sensitivity ChangeEffect on Net Cash Flow COGS %- 1%406,000 Price %+1%187,000 AR days118,000 INV/WIP days81,000 AP days+181,000 Volume %+1%-123,000

51 confidential. Revenue Growth % GM % Overheads % EBIT % Chapter 1 - Profitability

52 confidential. Chapter 2 – Working Capital Accounts Receivable Inventory/WIP Accounts Payable Working Capital % } Days

53 confidential. Growth in Net Non Current Assets Asset Turnover Chapter 3 – Net Non Current Assets

54 confidential. Net Cash Flow Borrowed Funds Cash After Operations GM% - WC% ROCE% Chapter 4 – Cash Flow and Returns

55 confidential. Interest Cover Debt Service Coverage Leverage Debt Payback Bank Measures

56 confidential. Why is cash flow important? What is profit – an opinion or a fact? What is a balance sheet – an opinion or a fact? What is cash flow – an opinion or a fact? Cash flow is the only fact in the accounts

57 confidential. Cash flow The term ‘cash flow’ is used in so many different forms, that it means something different to each of you. A consistent, meaningful, standardized definition of cash flow would be very helpful.

58 confidential. Net cash flow On the 1st of January 2008 I have $160 in the bank. On the 31st of December 2008 I have $60 in the bank. What is my net cash flow? 100 outflow

59 confidential. Net cash flow Why can’t we apply this logic to the company?

60 confidential. Gary’s net cash flow

61 confidential. Net cash flow Remember, as the providers of your finance, the bank always knows your cash flow. Ask yourself: is the bank providing funds to grow or to fund wastage?

62 confidential. Net cash flow We know that the Net cash flow for Gary's Furniture was -$3,260,073 Is that a good or bad?

63 confidential. Net cash flow We need to know what the money was spent on…. The 4 chapters approach to analysing cash flow will assist…...

64 confidential. The 4 chapters of cash flow

65 confidential. Marginal cash flow The additional cash that will be generated or used up if we sell $1 more of our product or services.

66 confidential. Marginal cash flow

67 confidential. Marginal cash flow for the next $1 of sales

68 confidential. Marginal cash flow for the next $1 of sales

69 confidential. Marginal cash flow for the next $1 of sales What does this tell us? For each additional $1 of sales the business will require 10.34c of funding If the existing relationships stay the same

70 confidential. Why is marginal cash flow important? Many businesses do not understand why as Sales increaseCash Flow deteriorates Solicitor Sales$100 Direct Costs$30 Gross Margin$70 Working Capital$80 Marginal Cash Flow$-10 The Balance Sheet in effect steals from the Income Statement

71 confidential. Profit vs cash flow High Margin Poor Balance Sheet Management = possibility of poor Cash Flow Low Margin Good Balance Sheet Management = possibility of good Cash Flow Solicitor Construction Company Obtains payments in advance, deposits, bills work in progress frequently, pays creditors slowly Many companies do not understand the relationship between profit and cash flow.

72 confidential. Marginal cash flow Products Product groups Customers Distributors State offices Business units Marginal cash flow can be very powerful to analyze components of a business:

73 confidential. A bank’s view of cash flow The cash flow methodology used by banks is not even the same as the ones used by you!!!!

74 confidential. A bank’s view of cash flow So what is a banker’s cash flow? All major Australian banks and most banks around the world use subtle variations of the same report. Many call it the UCA Cash Flow. No one seems to know what UCA stands for!!!

75 confidential. Banker’s cash flow Focuses on the 7 key items of cash flow: 1.Gross cash profit 2.Cash after operations 3.Net cash after operations 4.Net cash income 5.Cash after debt amortization 6.Net cash after investing 7.Financing surplus/(requirements)

76 confidential. Gross cash profit

77 confidential. Gross cash profit Gross cash profit is in turn made up of cash from customers & cash paid to suppliers. Gross cash profit is equivalent to the cash flow from gross margin. Note: COGS would exclude depreciation.

78 confidential. Cash after operations

79 confidential. Cash after operations Cash after operations is gross cash profits less Overheads and changes to balance sheet items relating to overheads such as provisions, accruals & prepayments. Cash after operations is equivalent to the cash flow from EBITDA Note: Overheads would exclude depreciation and amortization.

80 confidential. Net cash after operations

81 confidential. Net cash after operations Net cash after operations is cash after operations less changes in sundry assets & liabilities and income taxes paid. Income tax paid is not the tax charge per the profit & loss, but is the actual tax paid. Net cash after operations is the operating cash flow from which the providers of funding are paid.

82 confidential. Net cash after operations If you were the banker of Gary's Furniture what does a net cash after operations of negative $895,442 tell you?

83 confidential. Net cash income

84 confidential. Net cash income Net cash income is net cash after operations less interest and dividends paid. Interest and dividends paid are not the charge per the profit & loss, but the actual amounts paid. Net cash income is the cash flow from which the business must pay back debt.

85 confidential. Net cash income Gary's Furniture has a net cash income of negative $2,258m. As their banker how do you feel now?

86 confidential. Cash after debt amortization

87 confidential. Cash after debt amortization Cash after debt amortization is net cash income less commitment to retire debt. The most interesting aspect of cash after debt amortization is to look at what items are yet to be taken into account. Cada is BEFORE the purchase of fixed assets & investments. Is there enough cash flow generated after paying tax, interest, dividends & retiring debt to buy fixed assets or investments?

88 confidential. Cash after debt amortization Gary's Furniture has a cash after debt amortization of negative $2,258m As the banker to Gary's Furniture, how comfortable are you with their 2009 cash flow at this stage? Where is the company going to find the money to purchase the new coffee roaster?

89 confidential. Net cash after investing

90 confidential. Net cash after investing Net cash after investing is cash after debt amortization less net purchases of fixed assets and investments.

91 confidential. Financing / surplus (requirement)

92 confidential. Financing / surplus (requirement) Financing surplus is net cash after investing less extraordinary items.

93 confidential. Financing / surplus (requirement) Is equal to the Net Cash Flow that we calculated already.

94 confidential. How was the $3,260,073 financing requirement funded? $2,260,073 by short term borrowings $1,000,000 by long term debt

95 confidential. Banker’s cash flow A banker’s cash flow treats cash flow as a process rather than a number. The cash flow shows the flow of cash in and out of the business. As we have seen, the banker’s cash flow is a very good way of understanding the flow of money through our business.

96 confidential. Your Credit Officer

97 confidential. Your Credit Officer

98 confidential. Your Credit Officer

99 confidential. Your Credit Officer

100 confidential. A big picture for credit management Understanding the customer

101 confidential. Key Measures

102 confidential. Profitability

103 confidential. Assets

104 confidential. Working Capital

105 confidential. Cash Wastage

106 confidential. Strategy

107 confidential. RONA %


Download ppt "Confidential. Optimizing your cash flow during the downturn Alan Miltz Founding Director Inmatrix."

Similar presentations


Ads by Google