1 THE EXECUTIVE’S PROGRAM SESSION 12 MASTERING CASH FLOW
Purpose:To learn how to master cash flow Learning Objectives:To learn… • Why cash flow management is so important • What good cash flow management looks like • How to manage cash 2
PURPOSE AND LEARNING OBJECTIVES
AGENDA 1. Orienteering and tips 2. Why cash flow is so important 3. What good cash flow management looks like 4. How to manage cash:The 7 levers of cash & The 13-week cash flow 5. Breakout 6. Summary 3
SECTION 1 ORIENTEERING 4
ASSIGNMENT 1. Use your calendar. 2. Define 3 “I Musts” for the week and map the time to do them onto your calendar. 3. Schedule 3 hours: – Collect your financial statements – Calculate your margins and your ratios – Email us if you want a consultation 4. Come prepared to discuss during your coaching sessions. 5Proprietary and Confidential to RENEW LLC
Close your books by the 10th and hold your finance meeting on the 15th. DO NOT ABDICATE this work. You are the co-CFO.
Session Topics
The AMP Write down you AMP. Look to the Left! Strategic plan is the input. Use the AMP to set quarterly and monthly OKRs. Chop up your goals into bite size work that ultimately becomes weekly projects and I Musts.
Start with your Guiding Statements, and KISS and use it (Coffee Stains) to set your annual plans.
Intro to Finance and Accounting
Meeting Run great meetings! Use them to drive execution. Use meetings to drive execute. Have P, O and A for every meeting.
. Ask for their feedback! Follow your own rules set the example. Everyone is watching you.
Management Teams Have an org chart and use it to organize your company. Write PAs for those connected to you (your management team).
. Ask Why 7 times during your TvA meeting. Observe red flags in trends and common size.
The Habits Have a morning routine! Use your calendar. Set 3 “I Musts” each week and map them to your calendar.
ORIENTEERING: STEP-BY-STEP
If you did just one thing…
Intro to Execution Build your binder! “I should write that down.” Write SOPs. They are the treasure. Plan + Organized Team + PAs + SOPs + Battle Rhythm = Results!
Financial Analysis Part 1 Calculate your monthly TvA and ratios and do a quick common size and trend analysis
Governance Have a diverse group with authority (ideally a board) to give you feedback and holds you accountable to your plans
6
.
Reporting
Start measuring 5-10 KPIs for your company. Weekly or monthly. As you measure it, you will see improvements.
Strategic Planning Write down your 5-year plan
My calendar is getting hijacked
–
Stick with your calendar. Over time you’ll get better at managing it.
Your team will start to learn and conform. Use Google Tasks for short to-dos (less than 2 min). If takes more than 2 min put time on your calendar. Give yourself breathing time on your calendar. (2 hours on Monday for emails).
•
–
:
–
–
7
I can’t follow it
HINTS FROM FEEDBACK
HINTS FROM FEEDBACK so much to implement Change takes time. Give yourself about a month per session.We recommend 12-24 months for full implementation – We will provide you with a tool and a system to implement these disciplines. For now, listen and learn.Try to implement some of what you are learning, but not all, and not all at once. – Don’t let perfect be the enemy of great.
8
: –
• There’s
REAL BASIC RECAP 1. You shouldn’t abdicate accounting and finance – think of yourself as the Co-CFO 2. Ask your finance and accounting team/person to close the books on the 10th 3. Ask for the financial statements and a report on the 15th 4. Income statement – How did we perform…against targets? Ask why 7 times. How are our margins? Any trends? Month over month?Year on year? 5. Balance Sheet – How are my liquidity ratios / working capital? Do I have enough to cover my near-term obligations? 6. Cash Flow Statement – Is my cash flow from operations (CFO) positive? How is my CCC? Where is money getting held up? Receivables, inventory or payables? 9
10
Summary on Finance
We will have a summary and Q&A session on the four finance topics we covered the last 2 weeks. Wedendsay,April 28 starting from 12:00 – 1:30 PM. REGISTER
SECTION 2 WHY UNDERSTANDING CASH FLOW IS SO IMPORTANT 11
4.
WHY MANAGE CASH
2. Cash is consumed during start-up, periods of growth, or by management waste. Cash is what keeps you up at night. Companies with more cash win. that manage cash flow have more control. You can spot problems at your company, if cash in your plans does not match
3.
6.
5. Executives
cash in the bank. 12 Focus on cash.Watch it like a hawk.
1. Cash is the only thing that is “real”.
SECTION 3 WHAT CASH FLOW MANAGEMENT LOOKS LIKE 13
MANAGING CASH WELL ❑ Use of a 13-week Cash Flow forecast. Updated every week by management team. ❑ A short cash conversion cycle (CCC) that is being tracked. ❑ A large and growing Cash Flow from Operations (CFO). ❑ A healthy current ratio of more than 2 or 3 (CA/CL) ❑ Two months of operating expenses in reserve (war chest). ❑ What’s in the bank matches what’s on the Balance Sheet at the end of the period and matches the increase in cash from the CF statement. ❑ What’s in the bank matches what’s on the 13-WCF. 14
SIDEBAR: GENDER? IS THERE A DIFFERENCE IN HOW MEN AND WOMEN MANAGE CASH FLOW? 15
41% of male owners worry about their ability to match receipts with payments due, while only 32% of female owners said the same 41% of male owners agreed that their company doesn’t pay enough attention to its payments processes of technology, compared to 31% of women
41% of founderswomenworry about their cash comparedflowto46% of male founders (even though 97% of venture funding goes to male founders)
DIFFERENCES IN HOW MEN AND WOMEN VIEW FLOW
16
CASH
DIFFERENCES IN REVENUES OF MEN AND WOMEN OWNED BUSINESSES
SAME!THE Small businesses founded by women earn an average of 34% less revenue in their first year, (JP Morgan Chase Institute). Four years later, they have a median revenue of $68,000, compared to the $104,000 earned by maleowned firms. And only 18% of small businesses that receive external financing are owned by women. Despite these challenges, the study found that male and female-owned businesses have nearly identical survival rates.
▪
▪
17
▪
Q.What are the survival rates for men and women owned businesses?
hand between men and women owned businesses? YES! “Maybe
Chris Wheat, Director of Business Research, Morgan Chase Institute
JP
DIFFERENCES IN REVENUES OF MEN AND WOMEN OWNED BUSINESSES there a difference in on [womenowned businesses] are starting smaller, but they’re holding more cash, which is counterbalancing their ability to survive.”
18 Q. Is
cash
“Women buildingobsessedbusinesses-ownedarewithloyalty. They really build that sense of loyalty that makes it difficult to leave even if the pricing over time is better or the marketing is more pronounced elsewhere.”
19
“Guys are readyshoot-aim, whereas females, in my experience at least, are much more methodical about it,” he says. They’re better at knowing what they don’t know and seeking professional help.”
“Women are actually more competitive in their pricing, and are therefore able to get longer, more recurring business from the same clients,”
Q.Are there other differences between women and men owned businesses that impact cash flow?
INITIATIVES UNDERWAY TO HELP WOMEN OWNED BUSINESSES IN AFRICA WITH FINANCE 20 TRANSFORMATIVEPOLICYSOLUTIONSTO L E A A I L PolicyBrief TRANSFORMATIVEPOLICYSOLUTIONSTO SUPPORTWOMEN-LEDBUSINESSESIN AFRICAINAPOSTCOVID-19WORLD July,2020
WOMEN
INITIATIVES UNDERWAY TO HELP OWNED BUSINESSES IN AFRICA WITH FINANCE
21
SECTION 4 HOW TO MANAGE CASH 22
5. Step 5: Build up 2-months of operating expenses in a cash reserve.
23
2. Step 2: If you need more cash decide which of the 7 levers to pull.
1. Step 1:Analyze your statement of cash flow.
THE STEPS TO INCREASE CASH
3. Step 3: Manage cash with a 13-week (90-day) cash flow tool.
4. Step 4: Build a culture of cash flow awareness.
–
CFI = are you making investments or liquidating assets? CFF = are you getting or paying money? Where is it coming from? uses
• Other
24
STEP 1:ANALYZE – KNOW THE STATEMENT OF CASH FLOW • What it tells you: How healthy is the company? Where and how cash flows in and out of the company. • Layout: – Cash Start + Cash In – Cash Out = Cash End. Also, CFO + CFI + CFF = FCF • What to look at: –
CFO = are you making cash from operations? Want this positive and growing.
If net incomes is high but cash is low, you are likely not collecting or you are paying supplier too fast.
:
25Source: Accounting Coach
26
FINANCIAL STATEMENTS- MATCH
STEP 1:ANALYZE
STEP 1:ANALYZE – CASH CONVERSION CYCLE CCC = DIO + DSO – DPO 27 The time it takes from the moment you made a purchase of anything to getting cash in the bank. DPO = Average accounts payable COGS 365 X DSO = Average accounts receivable Net Sales 365 X DIO = AverageCOGSInventory365 X NOTE: Use 365 for the year Use 30 for the month
STEP 1:ANALYZE – MARGINAL CASH FLOW Marginal Cash Flow Quick Analysis 28 Revenue $42,000.00 COGS $28,980.00 Gross Profit $13,020.00 Gross Margin = Gross Profit / Sales 31% WorkingAccountsCapitalReceivable $8,630.00 Inventory $14,291.00 Accounts Payable $(5,558.00) Working Capital $17,363.00 Working Capital Margin = Working Capital / Sales 41% Marginal Cash Flow = Gross Margin – Working Capital Margin $-0.10 What does this tell us?
STEP 1:ANALYZE – MARGINAL CASH FLOW Bad: Marginal Cash Flow < 0 1. Volume is detrimental to growth – you are losing cash when you sell more. 2. Change two things: a. Increase gross margin: Charge higher prices, or lower raw materials and direct labor cost b. Reduce working capital: Lower AR, Lower inventory, Increase AP 29 Good: Marginal Cash Flow > 0
STEP 2: PULL YOUR CASH LEVERS 1. Price: Increase price of your goods or services. 2. Volume: Sell more at the same price. Can’t do if marginal cash flow is less than 0. 3. COGS: Reduce the price you pay for raw materials and direct labor. 4. Operating Expenses: Reduce your operating costs. 5. Accounts Receivable: Collect from your debtors faster. 6. Inventory: Reduce the amount of stock you have on hand. 7. Accounts Payable: Slow down the payment to creditors. 8. (Optional) Bad debt: Check credit before giving credit! 30 The 7 Levers of Cash
Marginal Cash Flow and Lever Excel tool demo Mastering Cash Tool - 2018.xlsx 31
STEP 3: MANAGE CASH • Use a 13-week cash flow • Set a minimum cash amount • Require your CFO to send it updated, every Monday • Open and read it! • If you see you will drop below the minimum and period in the future… 32
13-Week Cash Flow Excel tool demo 13-week cashflow 2018.xlsx 33
STEP 4: BUILD A CASH CULTURE • Set cash flow KPI targets: – Select one of the 7 levers. Improve one at a time. See if cash increases. • Monitor cash KPIs each month: – Cash flow KPIs should be in your reporting dashboard. • Incentivize performance: – Create incentives if you hit cash targets (not just sales and profit)! 34
STEP 5: GROW CASH Rule ofThumb 2 months of operating cost in cash reserves 35
SECTION 5 BREAKOUT 36
BREAKOUT DISCUSSION Flow from Operations
• What are you doing with inventory, payables and receivables management? • How do you understand the difference between net income and Cash
(CFO)? 37
SECTION 6 SUMMARY 38
SUMMARY • Understand your cash flow metrics – 1) how to read your statement of cash flows, 2) the CCC, and 3) your Marginal Cash Flow • To increase cash, select one of the seven cash levers and come up with a plan to change it. Monitor the KPI (cash) to track improvements • Build and use a 13 WCF – update it every week (part of your Finance Battle Rhythm) • Build up 2-months of operating cost as your cash reserve and sleep better at night 39
1. Use your calendar (I Musts, map all your time, set aside 3 hours for ON the business work)
3. Send your 13-week CF and your cash analysis tools to get into the next class.
40
HOMEWORK ASSIGNMENT
2. Schedule 3 hours: – Analyze your marginal cash flow – is it greater than 0? – Select 1 of the 7 levers to set a target to improve cash – Build your 13-week cash flow.This will take a few hours but it’s not complicated.
FEEDBACK 41Proprietary and Confidential to RENEW LLC
42 Thank you! www.renewstrategies.com
LABOR EFFICIENCY CALCULATIONS 43 Direct labor efficiency (DLR) = Revenue – NONLABOR direct costs Direct labor cost Sale labor efficiency (SLR) = Revenue – COGS Sales labor cost Management labor efficiency (MLR) = Revenue – COGS Management labor cost Why do we care about this?