HOW CAN I MAKE A PROFIT AND STILL RUN OUT OF CASH? Cash Management

Foundations Update  …and the market will continue to be competitive  More products  More aggressive  More options

Round 1

Round 2 Plus: A?? Bold Cent Dabble East Feast

Now Many Products ?

The story thus far…  Key points of strategy:  Product characteristics positioning matching ideal spot - critical in High Tech segment  Margin pricing not high enough costs not low enough automation too low low tech positioning too aggressive MTBF too high

The story thus far…  Sales forecasts possibly not accounting for lag in product introduction may need to plan for full-scale product demand in 2 years – not 1  Liquidation older products?  Products developing new products v. repositioning current products a viable strategy? What are the trade-offs?  Cash management running out of cash & making a profit?

Business Activities Your Cash Management decisions: 1. Operating: using $ create goods /services/ exchanges 2. Investing: what do you do with $ acquire assets (stuff) to run a business loan $ to others (who earn higher return) 3. Financing: where do you get $ funds to start and grow a business debt / equity / retained earnings

What Is Working Capital?  Working capital  Cash a business requires for day-to-day operations  Financing the conversion of raw materials into finished goods  On the Balance Sheet, Working Capital shows up as: Current Assets - Current Liabilities (cash, inventory, accounts receivable)(accounts payable)  Analysts look at these items for signs of a company's efficiency and financial strength. So Why Do WE Run Out Of Money?

1. Failure to Finance

 Working Capital and Cash Flow Operating Inventory Sales Accounts Receivable Cash Raw Materials If you turn a lot of cash into inventory but, less inventory back into cash (a lot of inventory left over) you run out of cash (its in the warehouse waiting to be changed back) Accounts Payable

janfebmaraprilmayjunejulyaugseptoctnovdec 75 Produce 600 in a year…with 1 shift 2. Product Availability 50 Produce 1200 in a year…with 2 shifts July 15 th Announcement date from R&D

Product Availability

3. Poor Forecasting Name Primary Segment Units Sold Units in Inventory Revision Date Age Dec.31 MTBF Pfmn Coord Size Coord Price Material Cost Labor Cost Contr Marg. AbleLow1, Jan $34.90$10.51$ % AwesomHigh Apr $44.95$14.75$ % Units * (Labor + Material) = Product Cost 424,000 * $23.64 =$10,023, ,000 * $26.12 =$13,033,880 $23,057,240 Inventory * Sales Price = Potential Revenue 424,000 * $34.90 =$14,797, ,000 * $44.95 =$22,430,050 $37,227,650 Money Spent Revenue Not Yet Received

Inventory  Too little inventory  sell all the sensors you make ==> Stock Out  lost sales & opportunities  Too much inventory  inventory is expensive- it ties up cash  product “ages” and is less desirable  reduces future year production resulting in laying off workforce  Just right  1 or more units left  less than 60 days (production scheduled/6)

Balance Sheet ASSETS Common Size Cash$00.0%$0 Accounts Receivable$5,8206.3%$6,657 Inventory$23, %$16,058 Total Current Assets$29, %$22,715 Plant & Equipment$79, %$53,570 Accumulated Depreciation($17,139)-18.6%($11,813) Total Fixed Assets$62, %$41,757 Total Assets$92, %$64,471 LIABILITIES & OWNER'S EQUITY Accounts Payable$4,5094.9%$5,609 Current Debt$19, %$5,303 Long Term Debt$24, %$17,833 Total Liabilities$47, %$28,745 Common Stock$22, %$12,823 Retained Earnings$21, %$22,902 Total Equity$44, %$35,725 Total Liabilities and Owner's Equity$92, %$64,471 Operating Working Capital Operating Working Capital

Selected Financial Statistics AndrewsBaldwinChesterDigbyErieFerris ROS-1.6%8.4%7.4%9.7%3.5%7.6% Turnover ROA-1.2%11.2%8.7%13.6%4.5%12.6% Leverage ROE-2.5%23.2%17.3%27.2%9.7%25.3% Emergency Loan$17,382,870$0 Sales$70,812,056$80,395,503$63,484,031$77,976,500$55,686,990$65,566,437 EBIT$3,567,596$13,347,824$9,936,972$14,472,966$5,326,078$9,575,620 Profits($1,129,822)$6,727,111$4,666,587$7,592,728$1,956,735$4,992,385 Cumulative Profit$13,735,874$24,261,851$14,122,476$25,205,039$11,348,149$14,839,392 SG&A % Sales12.4%9.9%9.7%10.6%9.9%13.1% Contrib. Margin %29.4%34.0%38.8%35.0%33.9%36.1%

Where is the Working Capital?  Cash has been depleted from last year  It was eaten up by inventory – a result of poor sales forecasting  Carrying costs  Accounts payable increased  Partially offsets high inventory levels (it is like an interest free loan from vendors)  Current Debt has increased by $19,116,000  If sales are increasing and need to fund inventory and accounts receivables (current assets), this may be justified.  It is not a good idea to fund long term assets (plant and equipment) with short term debt, because it could take years for this investment to pay off.

Business Activities

Investing  Create the company you want to run?  Build a new factory?  Increase capacity for a current product?  Increase Automation?  All will increase Plant & Equipment…  Any increase in the value of plant and equipment is a long term investment in your company  You should generate the funds from – Long term sources: Retained earnings Bonds Stock

Balance Sheet ASSETS Common Size Cash$00.0%$0 Accounts Receivable$5,8206.3%$6,657 Inventory$23, %$16,058 Total Current Assets$29, %$22,715 Plant & Equipment$79, %$53,570 Accumulated Depreciation($17,139)-18.6%($11,813) Total Fixed Assets$62, %$41,757 Total Assets$92, %$64,471 LIABILITIES & OWNER'S EQUITY Accounts Payable$4,5094.9%$5,609 Current Debt$19, %$5,303 Long Term Debt$24, %$17,833 Total Liabilities$47, %$28,745 Common Stock$22, %$12,823 Retained Earnings$21, %$22,902 Total Equity$44, %$35,725 Total Liabilities and Owner's Equity$92, %$64,471 Operating Working Capital Operating Working Capital Investing

Business Activities

Financing Funds to grow & operate  Borrow- issue bonds  Take on owners- Issue stock  Reinvest profits- increase retained earnings Extra cash (no investments to make)  retire bonds (lower interest payments)  retire stock (only if stock price is low)  pay dividend - (increase stock price)  Give the money back to rightful owners if you don’t have anything better to do with it

Financing… Put your worst case scenario in Marketing’s Unit Sales Forecast  Finance long term investments with long term options (stock or bonds)  Cover operating expenses with short term loans  Ending cash position target  3.5% and 7% of total assets

Balance Sheet ASSETS Common Size Cash$00.0%$0 Accounts Receivable$5,8206.3%$6,657 Inventory$23, %$16,058 Total Current Assets$29, %$22,715 Plant & Equipment$79, %$53,570 Accumulated Depreciation($17,139)-18.6%($11,813) Total Fixed Assets$62, %$41,757 Total Assets$92, %$64,471 LIABILITIES & OWNER'S EQUITY Accounts Payable$4,5094.9%$5,609 Current Debt$19, %$5,303 Long Term Debt$24, %$17,833 Total Liabilities$47, %$28,745 Common Stock$22, %$12,823 Retained Earnings$21, %$22,902 Total Equity$44, %$35,725 Total Liabilities and Owner's Equity$92, %$64,471 Operating Working Capital Operating Working Capital Investing Financing

Cash Flow Statement Cash Flows from Operating Activities Net Income (Loss)($1,130)$5,218Profit Adjustment for non-cash items Depreciation$5,326$3,571 Extraordinary gains/losses/writeoffs$0 Change in Current Assets and Liabilities Accounts Payable($1,101)$1,488 Inventory($7,692)($15,149)Too much inventory Accounts Receivable$837($1,057) Net cash from operations($3,760)($5,928) Cash Flows From Investing Activities Plant Improvements($26,320)($19,940)Increased Production Cash Flows from Financing Activities Dividends Paid$0 Sales of Common Stock$10,000$7,000Issue Stock Purchase of Common Stock$0 Cash from long term debt$8,000$9,000Issue Bonds Retirement of long term debt($1,733)$0 Change in current debt (net)$13,813$4,436Emergency Loan Net cash from financing activities$30,080$20,436 Net change in cash position$0($5,432) Closing cash position$0

Cash Flow Statement Cash Flows from Operating Activities2014 Net Income (Loss)($1,130) Adjustment for non-cash items Depreciation$5,326 Extraordinary gains/losses/writeoffs$0 Change in Current Assets and Liabilities Accounts Payable($1,101) Inventory($7,692)Too much inventory Accounts Receivable$837And Net cash from operations($3,760)A huge investment In plant and Cash Flows From Investing Activitiesequipment Plant Improvements($26,320) Cash Flows from Financing Activities Dividends Paid$0 Sales of Common Stock$10,000Too little Purchase of Common Stock$0 Long term financing Cash from long term debt$8,000 Retirement of long term debt($1,733)And you Change in current debt (net)$13,813Take an Net cash from financing activities$30,080Emergency loan Net change in cash position$0 Closing cash position$0

2013Common2014 Product NameAbleAwesomTotalSize Sales$51,744$19,068$70, %$80,993 Variable Costs Direct Labor$19,131$4,948$24, %$23,649 Direct Material$16,514$6,569$23, %$29,451 Inventory Carry$1,223$1,627$2,8504.0%$1,927 Total Variable Costs$36,868$13,144$50, %$55,027 Contribution Margin$14,876$5,924$20, %$25,966 Period Costs Depreciation$2,400$2,926$5,3267.5%$3,571 SG&A: R&D$35$300$3350.5%$554 Promotions$1,400$1,800$3,2004.5%$3,600 Sales$1,800 $3,6005.1%$3,600 Admin$1,185$437$1,6212.3%$3,021 Total Period Costs$6,820$7,263$14, %$14,347 Net Margin$8,056($1,338)$6,7189.5%$11,619 Other$3,1504.4%$800 EBIT$3,5685.0%$10,819 Short Term Interest$2,7963.9%$766 Long Term Interest$2,5103.5%$1,862 Taxes($608)-0.9%$2,867 Profit Sharing$00.0%$106 Net Profit($1,130)-1.6%$5,218 Income Statement