1. Understanding Business Cash Flow

2. www.sbdc.psu.edu About the SBDC Eighteen Centers in Pennsylvania More than 1,000 Centers Nationwide The SBDC network provides free confidential one- on-one consulting to current or potential small business owners and free and low-cost educational programs. www.pasbdc.org www.sbdc.psu.edu www.facebook.com/PennStateSBDC

3. www.sbdc.psu.edu Compare and Contrast What is Net Income? What is Cash Flow? Why do we study Cash Flow?

4. www.sbdc.psu.edu How to Go Broke While Making a Profit APC Co. makes widgets. The company is very successful with rapidly increasing sales. Widgets cost $.75 to make. Widgets sell for $1. Story reproduced and adapted from article in Business Week, April 28, 1956 pp.46-54

5. www.sbdc.psu.edu How to Go Broke While Making a Profit

6. www.sbdc.psu.edu How to Go Broke While Making a Profit

7. www.sbdc.psu.edu How to Go Broke While Making a Profit

8. www.sbdc.psu.edu How to Go Broke While Making a Profit

9. www.sbdc.psu.edu How to Go Broke While Making a Profit

10. www.sbdc.psu.edu At 8:00am on June 1 st, APC’s president got a desperate call from his treasurer: ‘Help, we ran out of money!’ What happened? What went wrong? Why did APC, a profitable company, go broke? How to Go Broke While Making a Profit

11. www.sbdc.psu.edu ‘Profit is not cash!’ How to Go Broke While Making a Profit

12. www.sbdc.psu.edu What other variables need to be factored into this scenario? APC company keeps a 30-day supply of widgets in inventory, based on projected sales APC’s customers have 30 days to pay for their purchases How to Go Broke While Making a Profit

13. www.sbdc.psu.edu How to Go Broke While Making a Profit

14. www.sbdc.psu.edu How to Go Broke While Making a Profit

15. www.sbdc.psu.edu How to Go Broke While Making a Profit

16. www.sbdc.psu.edu How to Go Broke While Making a Profit

17. www.sbdc.psu.edu How to Go Broke While Making a Profit

18. www.sbdc.psu.edu Remember—Profit is not cash! APC grew their inventory as sales increased APC grew their receivables as sales increased Inventory and receivables are great assets to have, but they are not cash How to Go Broke While Making a Profit

19. www.sbdc.psu.edu What exactly is cash flow? “The inflows and outflows of cash in a certain period”

20. www.sbdc.psu.edu Why do we study cash flow? To identify problems in a business To determine how a business is funding certain activities To determine if a company is managing its funds wisely To identify future funding needs To explain the relationship between net income and changes in cash

21. www.sbdc.psu.edu Sources and Uses of Cash Typical sources: What provides or frees up cash? –Sales, loan proceeds, investor funds, interest income, credit from vendors (accounts payable) Typical uses: What uses or ties up cash? –Paying employees, paying suppliers, repaying loans, paying operating expenses, paying taxes, capital expenditures owner’s withdrawals, credit to customers (accounts receivable)

22. www.sbdc.psu.edu Projecting Cash Flow Starting Cash Balance Beginning Inventory Beginning Accounts Payable Beginning Accounts Receivable

23. www.sbdc.psu.edu Projecting Cash Flow Estimate sales figures: –How much will be cash sales? –How much will be paid on account (30, 60, 90 days)? –What is the seasonality of the revenues? What are the operating expenses and when are they due during the year? Will there be any changes in these expenses during the year? Are capital expenditures planned? When will they take place and how will they be financed? How much of an owner’s withdrawal is planned? How much inventory is needed?

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25. What is your cash balance at the end of April? There is $5,000 in the checking account on January 1 st A copier is purchased on account, with $500 payments in January, February, and March Office supplies expense is $50 per month Payroll is $1,000 per month with payroll taxes due quarterly at 12% of wages Hook-up fees for the phone will be $200 and the expense will be $75 per month Quarterly insurance payments of $500 are due starting in March Rent is $350 per month Electric bills will be $50 per month from April through October, and $150 per month from November through March Other utilities are $40/month Sales are estimated $10,000 for January and February, $5,000 for March, and $10,000 for April through December, with 50% of each month’s sales due in 30 days 25% of the total sales are on credit card, with merchant processing fees of 2% Cost of goods sold is 40% of sales Vendor terms are cash on delivery only Advertising expense is $200 per month Owner’s withdrawals are $1500 per month Starting inventory is $15,000 Quarterly estimated taxes of $400 are due in April, July, and October

26. www.sbdc.psu.edu The Unexpected Happens In April, a customer calls and says he is not able to pay you the $2,500 he owes this month The marketing department is planning a new campaign, and thinks inventory should be increased by $ 3,500

27. www.sbdc.psu.edu Cash Flow vs. Profit Which company generated enough cash from this year’s operations to repay its $10,000 bank loan ? Profit/(Loss) Company A $30,000 Company B $10,000 Company C ($5,000)

28. www.sbdc.psu.edu Cash Flow vs. Profit Income Statement Profit/(Loss) Company A $30,000 Company B $10,000 Company C ($5,000) Change in Inventory (Increase)/Decrease ($20,000)($1,000)$5,000 Change in Receivables (Increase)/Decrease ($20,000)$5,000$10,000 Net Cash From Operations (Used)/Provided ($10,000)$14,000$10,000

29. www.sbdc.psu.edu When Cash Flow is Reduced Reduce expenses and outflows: –Cut back owner’s withdrawals –Decrease payroll hours or benefits –Shop for different suppliers –Predict revenues realistically to determine expenses accurately –Don’t buy unnecessary items –Buy used equipment and fixtures –Lease rather than purchase

30. www.sbdc.psu.edu When Cash Flow is Reduced Implement new marketing campaigns to increase sales Add other product lines to round out seasonality Review inventory: –Decrease inventory on hand –Discount and sell off old inventory Review product pricing Tap into a capital expense or emergency fund Sell off unused assets Negotiate with vendors Meet with your lender Borrow on a line of credit or factor receivables

31. www.sbdc.psu.edu Tips to Manage Cash Flow Schedule a time each day or week to review your financials and balance your bank statements and merchant account statements. Know your customers and keep open communications and maintain a firm business relationship with them Plan for seasonal changes Have controls for handling cash, including segregation of duties Have procedures for collection of accounts Watch inventory closely

32. www.sbdc.psu.edu Summary Operate your business according to your cash flow budget--all decisions must consider cash! Review your accountant’s cash flow statement or prepare your own Ask the SBDC to help you prepare and understand your cash flow statement

33. www.sbdc.psu.edu Questions?? 200 Innovation Boulevard, Suite 119, University Park 152 East Market Street, Suite 100, Lewistown 814-863-4293 717-247-1280 www.sbdc.psu.eduwww.sbdc.psu.edu sbdc@psu.edusbdc@psu.edu