Presentation on theme: "Optimizing your cash flow during the downturn"— Presentation transcript:
1Optimizing your cash flow during the downturn Alan MiltzFounding Director Inmatrix
2ObjectivesHow to conduct a financial health checkHow the banks would review your performanceTechniques used by the best global companies to measure financial performance
3Who am I?12 years ago I co-founded Inmatrix. We developed Optimist as a standard communication between Accountants, Banks & Companies.OptimistACB3
4A C B Optimist 22 Countries +1500 Accountants ‘000s of Companies +200 Banks
5Gary’s FurnitureWe are going to use a case study based on a company Gary’s Furniture.Gary’s Furniture was founded in 2001Gary is a furniture importer and manufacturer and distributes to 500 stores including majors and independentsGary believes he is doing fantasticallyB-91
7Gary’s FurnitureOn 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?
9Your 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?)
10How does finance measure your SCA? Profit?Revenue Growth?Cash Flow?Market Share?Return?Dividends?
11How does finance measure your SCA? ProfitRevenue GrowthCash FlowMarket ShareReturnDividends
12How do your accounts enable you to calculate these measures? ProfitRevenue GrowthCash FlowMarket ShareReturnDividends
20The management accounting equation – the balance sheet
21(The Dupont Theory of Financial Analysis) Why go into business?R eturn On Capital Employed (ROCE)ORReturn On Net Assets (RONA)ROCE = RONA(The Dupont Theory of Financial Analysis)
22Financial analysis – the theory Return on Capital Employed orReturn on Net Assets orROCE = EBIT/Net Operating AssetsORXEBITRevenueNet Operating Assets
23EBIT NOA 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.EBITNOA
24Optimizing Growth B C A D EBIT E NET ASSETS KEY POINTS Clear understanding of what the business is doingWhich 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 businessThere are options and the answer is ‘it depends’This provides a powerful partnership toolBOptimising growth?CFast growth?ADeclining Growth?DEBITECorporate stress?Re-engineeringWorking Investment?24m m m m m mNET ASSETS
35Techniques to improve your ROCE and Cash Flow MarketingOperationsInnovationHR
36Marketing – understanding your customers Most companies operate under the 80/20 rule –80% of their customers account for 20% of the revenue.
37Who do we want to work with? They want a relationshipThey don’t want a relationship1234We want a relationshipWe don’t wanta relationship
38Blind spot? Known by others Unknown by others Common Knowledge Private Known to youUnknown to you
39What do we do with the 3 and 4s? They want a relationshipThey don’t want a relationship12We want a relationshipIncrease priceEnforce strict termsWe don’t wanta relationship
40What 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.
41Operations – where are your overheads? They want a relationshipThey don’t want a relationship1234We want a relationshipWe don’t wanta relationship
42Who 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.
43The role of FinanceFinance’s role is to measure your company from a business and banking perspective.
52} Chapter 2 – Working Capital Accounts Receivable Inventory/WIP Accounts PayableWorking Capital %}Days
53Chapter 3 – Net Non Current Assets Growth in Net Non Current AssetsAsset Turnover
54Chapter 4 – Cash Flow and Returns Net Cash FlowBorrowed FundsCash After OperationsGM% - WC%ROCE%
55Bank MeasuresInterest CoverDebt Service CoverageLeverageDebt Payback
56Why 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
57Cash flowThe 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.
58Net 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
59Why can’t we apply this logic to the company? Net cash flowWhy can’t we apply this logic to the company?
69Marginal 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 fundingIf the existing relationships stay the same
70Why is marginal cash flow important? Many businesses do not understand whyas Sales increaseCash Flow deterioratesSolicitorSales $ 100Direct Costs $ 30Gross Margin $ 70Working Capital $ 80Marginal Cash Flow $ -10The Balance Sheet in effect steals from the Income Statement
71Profit vs cash flowMany companies do not understand the relationship between profit and cash flow.High MarginPoor Balance Sheet Management= possibility of poor Cash FlowSolicitorLow MarginGood Balance Sheet Management= possibility of good Cash FlowConstruction CompanyObtains payments in advance, deposits, bills work in progress frequently, pays creditors slowly
72Marginal cash flowMarginal cash flow can be very powerful to analyze components of a business:ProductsProduct groupsCustomersDistributorsState officesBusiness units
73A bank’s view of cash flow The cash flow methodology used by banks is not even the same as the ones used by you!!!!
74A 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!!!
75Banker’s cash flow Focuses on the 7 key items of cash flow: Gross cash profitCash after operationsNet cash after operationsNet cash incomeCash after debt amortizationNet cash after investingFinancing surplus/(requirements)
77Gross cash profitGross 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.
79Cash after operationsCash 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 EBITDANote: Overheads would exclude depreciation and amortization.
81Net 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.
82Net 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?
84Net cash incomeNet 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.
85Net cash incomeGary's Furniture has a net cash income of negative $2,258m.As their banker how do you feel now?
87Cash 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?
88Cash after debt amortization Gary's Furniture has a cash after debt amortization of negative $2,258mAs 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?
92Financing / surplus (requirement) Financing surplus is net cash after investing less extraordinary items.
93Financing / surplus (requirement) Is equal to the Net Cash Flow that we calculated already.
94How was the $3,260,073 financing requirement funded? $2,260,073 by short term borrowings$1,000,000 by long term debt
95Banker’s cash flowA 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.