Create a Strong Cash Flow Cycle Lori Supinie Senseney Music

Agenda Define Cash Cycle Discuss Cash Cycle components Ways to strengthen Cash Cycle

Cash Cycle Defined Length of time needed to turn economic inputs/resources into cash flows Economic inputs: Accounts Receivable, Inventory, and Accounts Payable (working capital)

Why Analyze your Cash Cycle? Cash is king Operations are a cash pump Financial effectiveness – reducing inefficiencies (yours, your suppliers, and your customers)

Components of Cash Flow Cycle: Ratios Accounts Receivable Outstanding in Days (A/R OD) Inventory Turnover (I/T) Accounts Payable Outstanding in Days (A/P OD)

Components of Cash Flow Cycle: Formula A/R OD + I/T – A/P OD = Cash Flow Cycle (# Days) Accounts Receivable (average) Sales (annual) Inventory (average) COGS (annual) Accounts Payable (average)

Accounts Receivable Outstanding in Days: A/R / Sales X 365 For example: 500,000 / 2,000,000 X 365 = 91 days

Inventory Turnover Average Inventory / COGS X 365 For example: 500,000 / 1,200,000 X 365 = 152 days

Accounts Payable Outstanding in Days: A/P / COGS X 365 For example: 200,000 / 1,200,000 X 365 = 61days

Cash Flow Cycle A/R OD + I/T – A/P OD = Cash Flow Cycle – 61 = 182 days

What’s a good number? It depends! Benchmarking is difficult; moving your own needle is not Some general observations: –The more “retail” you are, the lower the number tends to be –The more “financing” you do, the higher the number tends to be –The more stores you have, the higher the number tends to be –Vendor financing results in a lower number

Ways to Lower Cash Cycle Number of Days Whole store approach –Accounting –Inventory Purchasing –Sales & Marketing

Ways to Lower Cash Cycle Number of Days Accounting –Credit & Collection policies (tighten terms, take action earlier, offer early pay discounts) –Bill immediately or align your statement cycle –Reduce errors

Ways to Lower Cash Cycle Number of Days Inventory Purchasing –Negotiate with vendors (schedule deliveries, consignment, terms) –Reduce errors –Increase turns (balance between acquisition costs of smaller quantity orders and carrying costs)

Ways to Lower Cash Cycle Number of Days Sales & Marketing –Reduce customer service errors –Better forecasting (Hope is not a plan!) –Less in-house financing –Sales and product training for staff

Conclusion & Cautions Importance of Strong Cash Cycle Don’t squeeze vendors Verify improvements

Questions? Lori Supinie Senseney Music