Business Cash Flow Cycle 2

OUTGOING CASH

1. Interest on debt servicing – payable periodically. If the company defaults, a full range of legal consequences can follow including removal of Directors, appointment of Receiver/Manager, rescheduling of company debts, restructuring the company, selling collateral, or winding-up the company.

2. Operating Expenses – also known as Overheads. These are usually all expenses that are not directly related to Production.

3. Plant & Equipment – Also the subject of Capital Budgeting, companies have to decide whether to buy or lease such equipment and how long to keep them to claim Depreciation expenses in their Accounts.

4. Manufacturing Expense and Inventory Control – A major cash flow drain, which does not operate at constant levels. High levels of sales, or large variety of products, require high levels of inventory. Also Inventory builds up to reduce the cost of Production, and as a result of uneven sales.

5. Dividends – both private and public companies pay them, sometimes several times a year. There is no legal obligation to declare or pay dividends.

6. Corporate Taxes – may require to be estimated and paid in advance.

© 2006 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Business Cash Flow Cycle 1

This 2 part breakdown given an overall understanding of how cash moves through a business.

INCOMING CASH

1. Shareowners capital – these are the individuals who really own the company. They provided the initial cash injection when the company was incorporated (or contributed to the business if it was a partnership). In return, they received shares in the company. They can be asked for money periodically, in return for additional shares. Shareholders capital also includes angel investors and venture capitalists. They will however, seek to be repaid on terms and within a certain time frame and should be regarded as private lenders. Whilst they are invested in the company, venture capital shareholders might wish to direct the management of the company.

2. Borrowing – from private lenders or banks. Can either be short term or long term and are the company’s Lines Of Credit. Some can be negotiated beforehand and some companies resort to short term borrowing several times a year. Security or Collateral is required and interest is payable to service the loans.

3. Marketable Securities or Commercial Paper – usually available to the largest and financially strongest companies only. Essentially, the company goes into the Money Market and issues an IOU to obtain large amounts of cash which it will repay on terms at a future date.

4. Accounts Receivables – theoretically the main source of cash into a business. It is generated through sales and timely payment of invoices. In practice, many companies have poor control of their Receivables. This means that their invoices are not properly followed up and their cash flow becomes unpredictable. This impacts the company’s ability to fulfil new orders, grow, invest in marketing, and pay operating expenses such as salary and debt servicing. Poor control of Accounts Receivables can make or break a company.

© 2006 Sanjeev Aaron Williams & Cashwerks All Rights Reserved

Watching Your Cash Flow?

Did you raise enough “seed capital” or “angel investment” or “mezzanine financing” or full blown venture capital?

Exactly what stage of growth is your company at?

How good was your sales forecasting?

How tightly are your expenses being controlled? Are you bleeding the company by drawing prematurely excessive salary?

Reduce inventory to minimal acceptable levels. Consider “just in time” inventory. Otherwise you might be forced to unload unsold inventory at “fire sale” prices.

Inventory financing can be very expensive. A business is effectively penalized by the bank if the inventory offered as collateral remains unsold for too long.

Consider Equipment Leasing strategies instead of buying outright. There may be tax concessions.

Rate your customers on credit worthiness. Decide who will be given credit and for how long.

Revamp you internal Accounts Receivables Management. When the Receivables are factored, the funding source effectively becomes the Receivables Management division of the company. This saves time and expense. It allows the business to focus on sales and marketing which are direct revenue generators.

Bill more frequently – then factor the invoices for faster cash flow. This tactic works best when factoring invoices from your best i.e. most creditworthy clients.

Early payment incentives to your debtors rarely work. Factoring the invoice that you send them does. The cash can be made available within 24 – 48 hours.

© 2006 Sanjeev Aaron Williams & Cashwerks All Rights Reserved