Cash Flow Management Strategies for Business Success

© 2004-2019 Priora® Cash Flow Management,
LLC All Rights Reserved
1
“Applying Cash Flow
Management
Strategies”
December 2, 2019
Session 1 of 2

2
Presented by
Tony Busch
Priora® Cash Flow Management, LLC
(920) 450-2840
tony@prioracfm.com

3
Part I
1. Profit vs Cash Flow – what really counts
2. Cash flow cycles
3. Key ratios
• Leverage Ratio
• Debt Service Coverage Ratio
• Working Capital Ratios
– Inventory Turnover
– Accounts Receivable turnover
– Accounts Payable turnover
4. Income Statement
5. Balance Sheet
6. Statement of Cash Flows
2-Parts: Applying Cash Flow Management Strategies

4
2-Parts: Applying Cash Flow Management Strategies
Part II
1. Business Plan – complete with supporting written assumptions
2. Projections for next 12 months – Most likely, Best Case and Worst Case
3. Debt structure strategies
4. Collateral coverages to be offered to lender
5. What lenders consider when granting business loans
• Character, Capacity Collateral
6. Criteria lenders use to evaluate a business loan request
• Quality, Income, Quantity
7. Presenting your loan request to the lender (up to 10 of them):
“I would like you to review my business plan and offer me a proposal
how to fund my business plan.”
Remember the WWW rule:
Who will do What, When
Ask for a timeline!!
8. Use your limbic brain as well as your neo-cortex
Watch Simon Sinek YouTube video,(Viewed over 47Million times)
https://www.ted.com/talks/simon_sinek_how_great_leaders_inspire_action?langu
age=en
It is titled, “How Great Leaders Inspire Action” Entrepreneurs must develop
leadership skills.

5
Quality assets
The higher the better for
both lender and borrower.
Minimum standard of acceptable asset performance
LEAVE
Sufficient quality, as measured by prudent lending practices, means the asset will remain above the
line. Standards by bank will vary.
Criteria lenders use to “measure” the quality of their assets (loans) includes the leverage ratio; the debt
service coverage ratio; the liquidity as measured by A/R, A/P and Inventory turnover ratios, and
the cash flow performance of the borrower.
Deterioration results in being below the line. If problems persist, the lender will ask the borrower to
leave the bank.
Borrowers need to understand how their daily business decisions impact the ratios lenders use to
measure the quality of their loan relationship. The best way for the borrower to apply these
principles is to prepare an effective cash flow budget and manage it at least monthly.
The higher above the red line the better the relationship for both the borrower and the lender because
the risk associated with that asset is less. And the more options the borrower will have from
lenders. Because competition increases the borrower can negotiate more successfully.

6
Profit:
• A company generates a profit when its revenues and gains are greater than its
expenses and losses. Profits increase a company's retained earnings and generally
an owner's equity value.
www.theaccountspayablenetwork.com/html/modules.php
• Profit is an accounting concept, normally the bottom line of the Income Statement,
which is also called Profit or Loss statement. Start with sales, subtract all costs of
sales and all expenses, and that produces profit before tax. Subtract tax to get net
profit.
www.mplans.com/gm/index.cfm
• Total revenue less total expenses for a period of time calculated in accordance with
generally accepted accounting principles.
www.smallbiz.nsw.gov.au/smallbusiness/Resources/Business+Tools/Glossary+of+Bu
siness+Terms/
• The amount of money that is left after all expenses have been paid.
www.ktec.com/sec_news/hs_busplan/definitions.htm
Definitions

7
Cash Flow:
• Reported net income of a corporation plus amounts charged off for depreciation,
depletion, amortization, and extraordinary charges to reserves, which are
bookkeeping deductions and not paid out in actual dollars and cents.
www.4insurance.com/annuity/glossary.asp
• Cash money flowing in and out of the business. Cash flow is not the same as
profitability.
www.extension.iastate.edu/agdm/wholefarm/html/c3-05.html
• A measure of cash inflow and outflow from the business. Positive cash flow means
more money is coming into the business than is leaving it. Negative cash flow is the
converse.
www.aaamortgagesolutions.com.au/glossary.htm
• An accounting presentation showing how much of the cash generated by the
business remains after both expenses (including interest) and principal repayment on
financing are paid. A projected cash flow statement indicates whether the business
will have cash to pay its expenses, loans, and make a profit. Cash flows can be
calculated for any given period of time, normally done on a monthly basis.
www.business.gov/phases/launching/are_you_ready/glossary.html
Definitions

8
Definitions
So, what is Cash Flow - really?
• It is the timely, balanced movement of cash received and cash
paid, and when, out during a specific period of time, often
measured during the fiscal year.
• A positive cash flow is one that results in a cash surplus.
• A negative cash flow is one that results in a shortfall.
It is different from Profit!
Lenders do not fund negative cash flow!!

9
Overall Cash Flow
As cash flows between the P & L and Balance Sheet
Income Statement Balance Sheet
Sales Current Assets
Long Term Assets
TOTAL ASSETS
Expenses
(1) Liabilities
(2)
Net worth
Net Profit
TOTAL LIABILITIES &
(3) NET WORTH
Owner Draw
MAINTAIN EFFICIENCY & BALANCE

10
Cash Conversion Cycle
• The impact of the cash conversion cycle is the length of
time between a firm's purchase of inventory and the
receipt of cash from accounts receivable.
Maintain Efficiency & Balance!!
Delays in the flow of cash negatively impacts success!
Understand what a ‘use’ and a ‘source’ of cash is!
Inventory
Cash
Accounts Receivable

11
Leverage Ratio
Leverage ratio is calculated using the balance sheet.
The lower this ratio, the better. Maximum is usually 4:1.
This ratio demonstrates to the lender that the borrower has a
major “stake” in the company.
Total debts: $350,000 = 3.125 x
Net Worth: $112,000
The lower this ratio the lower the amount of debt to be serviced by
cash flow.
The less debt to be serviced, the stronger the company and the
greater the ability to fund growth or provide more income to the
owner.
There may be adjustments to Net Worth, e.g., subordinated debt,
intangible assets and debts to company by owners

12
Debt Service Coverage Ratio
Debt Service Coverage Ratio: The amount of cash
flow available to pay the debt obligations. =>1.2x
Net Income 40,000 40,000
Plus:
Depreciation 20,000 20,000
Interest Exp 15,000 15,000
Cash available for DSC 75,000 75,000
Plus: changes from BS 20,000 -15,000
Net cash available 95,000 60,000
Debt service 55,000 55,000
Excess(Deficit) 40,000 5,000
Debt service coverage ratio 1.72x 1.09x
Balance sheet counts!

13
Three different Sources and Uses of Working
Capital: (Found in Statement of Cash Flows)
• Operations: cash inflows and outflows caused by core
business operations from a company’s products or
services. Examples include Accounts Receivable,
depreciation, inventory and Accounts payable.
• Investing Activities: Changes in equipment, assets or
investments relate to cash from investing activities.
• Financing: Changes in debt, loans or dividends are
accounted for in cash from financing activities.
Sources and Uses of Cash Flow

14
Three Operations Cash Flow Ratios
Referred to as Working Capital:
Inventory Turnover Ratio
•Measures how frequently inventory turns over during the year and,
on average, how many days’ supply of inventory is on hand.
Accounts Receivable Turnover Ratio
•Measures how many times during the year the A/R are collected
and, on average, how many days the company must wait to be paid.
Accounts Payable Turnover Ratio
•Measures how many times during the year the A/P are paid in full,
and, on average, how many days the company uses the vendor’s
money.

15
Annual Cost of Goods Sold (COGS)/Average Inventory
•Average Inventory means adding each month end inventory number during the year
and divide by 12 to determine the “average” monthly inventory for the year.
$98,000/$14,760 (Avg. Inv. for the year) = 6.64 times
(Higher is better because it generates more cash)
Average Number of Days Inventory Will Last
360 days in year/6.64 times = 54 days of inventory
(The longer this period, the longer your cash is tied up).
What is the trend from year to year?
How does it compare to industry standards?
What can you do to reduce the cost of inventory during the year?
An increase in inventory is a use of cash, a decrease is a source of cash.

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Inventory Management Strategies
Managing Inventory
Stocks sold to generate sales.
Quantity control, use purchase plan, shipping
Audits annually with running totals
Just in time
Stale & damaged inventory
Inventory turnover rates
Theft
Vendor discounts
An increase in inventory is a use of cash, a decrease is a source of cash.

17
Sales/Average Outstanding Accounts Receivable
•Average A/R means adding each month end during the year divided by 12 to
determine the “average” monthly A/R balance.
$175,000/$47,500 (Avg. A/R for the year) = 3.89 times per year
(Higher is better because it generates more cash flow)
Average Days A/R are Outstanding
360 days in a year/3.89 times = 92.5 days
(Shorter is better because it generates more cash flow)
What is this trend, year-to-year?
What can you do to reduce the Avg. Days Outstanding?
This is you being a “bank” to your customers.
An increase is A/R is a use of cash, a decrease is a source of cash.

18
Accounts Receivable Strategies
Managing Accounts Receivable: Money owed to the organization from
outside sources for services rendered.
Have customers prepay
Bill weekly, not monthly
Track aging of accounts receivable
Act on A/R over 30 days. Avoid aged A/R
Offer discounts to your customers to collect sooner
Get paid for long A/R. Incentives to staff to collect
Review and examine customer credit terms
Irrevocable letters of credit
An increase is A/R is a use of cash, a decrease is a source of cash.

19
Annual Cost of Goods Sold (COGS)/Average Outstanding
Accounts Payable.
•Average A/P means adding each month-end balance
during the year divided by 12 to determine the “average”
monthly accounts payable balance for the year.
$98,000/16,725 (Avg. A/P for the year) = 5.86 times
Average Days A/P are Outstanding
360 days in a year/ 5.86 = 61.4 days
What is this trend year to year?
What can you do to not aggravate your vendors? To take discounts?
This is an alternative source of “borrowed” funds, other than bank.
An increase is A/P is a source of cash, a decrease is a use of cash.

20
Accounts Payable Strategies
Why take vendor discounts?
 Vendor invoice is $20,000, terms are 1% 10, net 30
 Interest rate on working capital line of credit is Prime + 2% (9.5%)
 Pay invoice in 10 days and spend $19,800, savings of $200.
o Every ten days is a savings of 1%
o 360 days divided by 10 days equals 36 periods
o 36 periods times 1% equals an annual rate of 36%
o 36 times $200 equals annual savings of $7,200
 Cost of borrowing on line for 30 days is $158
($20,000 x 9.5% divided by 360 days x 30 days)
($20,000 X 9.5% divided by 360 days x 10 days = $52.77)
 Taking discount saved $200, even if it cost $158 to borrow the
money to take the discount. A net savings of $42.
(If borrowed for only 10 days, a savings of $147.23)

21
Liquidity Calculations
What is Working Capital?
It is the amount of cash coming into the company in the
next 12 months measured against the amount of cash
leaving the company in the next 12 months.
Calculated by deducting Current Liabilities from Current
assets.
Should be a minimum of zero. The higher the difference
the stronger the cash position of the business. Be sure
to include current maturity of Long Term Debt!!

22
What is the current Ratio?
Current Assets divided by Current Liabilities:
Measures the net cash position for the next 12
months. Ratio should be 1:1 or higher.
What is the Quick Ratio?
Cash, Accounts Receivable (collectible portion)
and marketable securities divided by Current
Liabilities. Measures how quickly cash can be
generated to pay Current Liabilities. Usually .5
to 1. Higher the better. 1:1 not the minimum.

23
Who is in control of this process?
Drive thy business or it will drive
thee…?
- Benjamin Franklin

24
Why do businesses fail?
1. General Business Factors:
• Lack of a thorough, researched business plan - 78%
• Being overly optimistic - 73%
• Insufficient/irrelevant experience - 63%
• Not playing to strengths or seeking help - 70%
2. Financial Factors:
• Starting out with too little capital - 79%
• Poor cash flow management/understanding - 82%
• Not pricing properly. No break-even done - 77%

25
Why do businesses fail?
3. Marketing Factors:
• Not seriously marketing firm - 64%
• Not knowing/ignoring competition - 55%
• Customer concentration - 47%
4. Human Resources:
• Micro-managing, no empowerment - 58%
• Hiring the wrong people - 56%
In an effort to identify potential trouble spots for entrepreneurs, a small group of professionals who regularly deal with
small business formed a task force to discuss why so many small businesses either fail, or fail to thrive. By
designing a questionnaire and then surveying several dozen individuals, ranging from accountants to bankers
to non-profit agencies and representatives of SCORE and SBA, the above list was created. This list
represents how frequently certain factors appeared in businesses that had failed or were failing to grow.
Source: Jessie Hagen, U. S. Bank

26
Why do businesses run out of cash?
1. Business owners don’t budget and manage
their cash position and they don’t know how
their costs behave.
2. They lose control of accounts receivable.
3. They lose control of inventory.
4. They don’t understand break-even analysis.
Successful pricing based on understanding
break-even.
5. Poor/untimely reporting of key performance
factors – e.g., cash, ratios, pricing.

27
Cash vs Accrual Accounting
1. Choose Cash or Accrual accounting.
Either can be used as long as the system used does
not distort taxable income. Generally, businesses with
inventory are required to use accrualmethod. Both can
be used to manage the business.
2 Cash Method
Recognizes sales/expenses when cash is exchanged,
not when transaction occurs.
3 Accrual method
Recognizes the sale/expense when Transaction
occurs not when cash is exchanged.

28
Financial Statements
Defined as a management report showing the revenue,
expenses and loss(profit) for a specified period of time.
Can be daily, monthly, quarterly in addition to annually.
• Income statement (Profit & Loss)
• Balance Sheet
• Statement of Cash Flows
Know how to use them!!!
That is, learn how your daily business decisions impact the
cash flow of your business.
Don’t forget about projections, monthly and annually.

29
Income Statement
(000’s) 2017 (%) 2018 (%)
Revenue 3,127 (100) 2,908 (100)
Cost of Goods Sold 906 (29) 1,068 (36.7)
Direct Labor 406 (13) 522 (19)
Total COGS 1,312 (42) 1,590 (54.7)
Gross Profit 1,725 (55) 1,313 (45.2) (Also referred to as Contribution Margin)
Operating Expenses
Facilities 458 (14.6) 241 (8.3)
Marketing 72 (2.3) 72 (2.4)
Labor – Admin 553 (17.7) 400 (13.8)
Payroll Taxes/Ben. 212 (6.8) 189 (6.5)
Other Operating Exp 52 (1.7) 142 (4.9)
Total Operating Exp 1,347 (43.1) 1,044 (35.9)
Net Operating Income 378 (12) 269 (9.3)
Other Income(Expense)
Depreciation 101 (3.2) 135 (4.6)
Other Income(Expense) 175 (6)
Interest Expense 18 (.6) 17 (.6)
Total Other Inc/(Exp) (119) (3.8) (152) (5.2)
Pre-tax Income 259 (8.3) 117 (4)
Tax (25%) 65 (2.1) 68 (2.3)
Net Income 165 (5.3) 49 (3)

30
Balance Sheet – Assets
(000’s) 2017 2018
ASSETS
Current Assets:
Cash 148 (15.9) 242 (28)
Accounts Receivable 440 (47.2) 230 (26.6)
Inventory 149 (16) 183 (21.2)
Other Current Assets 4 (.4) 4 (.5)
Total Current Assets 741 (79.6) 659 (76.3)
Fixed Assets
Equipment 870 (93.4) 1,020 (118)
Accumulated Depreciation (820) (88.1) (955) (111)
Net Value of Fixed Assets 50 (5.4) 65 (7.5)
Other Assets 140 (15) 140 (16.2)
Total Assets 931 (100) 864 (100)

31
Balance Sheet – Liabilities & Net Worth
2017 2018
Liabilities and Shareholder’s Equity
Current Liabilities:
Accounts Payable 342 (36.7) 210 (24.3)
Credit Card Payable 13 (1.4) 1 (.1)
Other Current Liabilities 78 (8.4) 130 (15.4)
Total Current Liabilities 433 (46.5) 341 (35.4)
Long Term Liabilities:
Notes Payable (amount due beyond 12 mos) 239 (25.7) 207 (30.4)
Total Liabilities 672 (72.2) 548 (39.5)
Shareholder’s Equity
Common Stock 3 (.3) 3 (.3)
Distributions (1) (.1) (30) (3.5)
Retained Earnings 93 (1) 294 (34)
Profit(loss) for the year 165 (17.7) 49 (5.7)
Total Shareholder’s Equity 260 (27.9) 316 (36.6)
Total Liabilities & Shareholder’s Equity 931(100) 864 (100)

32
Statement of Cash Flows
(000’s) 2017 2018
Operating Activities
Net Income 259 117
Plus: Depreciation 101 135
Changes in:
Accounts Receivable (195)* 210
Other assets (90) - - -
Accounts Payable 82 (132)
Credit Cards (3) (12)
Other Current Liabilities 65 52
Cash Provided by Operations 219 370
Investing Activities:
Purchase of fixed assets (70) (150)
Net Cash Provided before financing 149 220
Financing Activities:
Notes Payable 23 (32)
Shareholder Distributions (111) (95)
Cash Used for financing (88) (127)
Increase in Cash 61 93
Beginning Cash 87 148
Ending Cash 148 242
* () indicates a use of cash, or, a reduction of cash available to the company

33
2017 2018
What is the Working Capital? $308 $318
What is the current Ratio? 1.71x 1.93x
What is the Quick Ratio? 1.36x 1.38x

34
Working Capital Ratios
2017 2018
Accounts Receivable Turnover:
Assume the average Accounts Receivable balance for 2017 is $310,000, 2018 is $135,000 36 days 17 days
Sales divided by Average Accounts Receivable for the year.
Then divide that answer into 365 days to obtain the Turnover rate for each year.
Accounts Payable Turnover:
Assume the average Accounts Payable balance for 2017 is $176,000, for 2018 is $198,000 49 days 45 days
COGS divided by the Average Accounts Payable for the year.
Then divide that answer into 365 days to obtain the Turnover rate for the year.
Inventory Turnover:
Assume the average Inventory balance for 2017 is $139,500, 2018 is 172,000 39 days 40 days
COGS divided by the Average Inventory for the year.
Then divide that answer into 365 days to obtain the Turnover rate for the year.

35
Ratio Calculations Worksheets
Using the data from the previous Income
and Balance Sheet statements, complete
the following calculations:
1. Leverage Ratio:
2017 2018
Show the figures here:
Total Liabilities/Total Equity 672/260=2.58x 548/316=1.73x

36
Ratio Calculations Worksheets
1. Debt Service Coverage Ratio:
Assume the monthly principal and
interest payment is $3,000.
2017 2018
Net Income 165 49
+Interest Expense 18 17
+Depreciation 101 135
Equals Total Cash Available for Debt Service (CADS) 284 201
(Monthly Principal and Interest Payment 36 36
is $3,000)
284/36=8x 201/36=5.6x

37
Agenda for December 16, 2019
Part II
1. Business Plan – complete with supporting written assumptions
2. Projections for next 12 months – Most likely, Best Case and Worst Case
3. Debt structure strategies
4. Collateral coverages to be offered to lender
5. What lenders consider when granting business loans
• Character, Capacity Collateral
6. Criteria lenders use to evaluate a business loan request
• Quality, Income, Quantity
7. Presenting your loan request to the lender (up to 10 of them):
“I would like you to review my business plan and offer me a proposal to
fund my business plan.”
Remember the WWW rule:
Who will do What, When
Ask for a timeline!!
8. Use your limbic brain as well as your neo-cortex
Watch Simon Sinek YouTube video,(Viewed over 47Million times)
https://www.ted.com/talks/simon_sinek_how_great_leaders_inspire_action?langu
age=en
It is titled, “How Great Leaders Inspire Action” Entrepreneurs must develop
leadership skills.

38
Quality assets
The higher the better for
both lender and borrower.
Minimum standard of acceptable asset performance
LEAVE
Sufficient quality, as measured by prudent lending practices, means the asset will remain above the
line. Standards by bank will vary.
Criteria lenders use to “measure” the quality of their assets (loans) includes the leverage ratio; the debt
service coverage ratio; the liquidity as measured by A/R, A/P and Inventory turnover ratios, and
the cash flow performance of the borrower.
Deterioration results in being below the line. If problems persist, the lender will ask the borrower to
leave the bank.
Borrowers need to understand how their daily business decisions impact the ratios lenders use to
measure the quality of their loan relationship. The best way for the borrower to apply these
principles is to prepare an effective cash flow budget and manage it at least monthly.
The higher above the red line the better the relationship for both the borrower and the lender because
the risk associated with that asset is less. And the more options the borrower will have from
lenders. Competition increases.

39
Summary
Priora® Business.
“You can take it to the bank.”
Thank you for attending. I hope you
learned meaningful ways to understand
and manage your cash flow to improve
the performance of your business.

40
Thank You!
Tony Busch
Priora® Cash Flow Management, LLC
(920) 450-2840
tony@prioracfm.com

Cash Flow Management Strategies for Business Success

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