DKH Enterprises, Inc.

Managing Cash:A Startup’s First Financial Priority

“cash and no profits is better than profits and no cash”

June 2007 DKH Enterprises, Inc. Business Advisors 2

DKH Enterprises, Inc. Financial Reporting vs. Managerial Accounting

CFO

Treasurer Controller

• Credit• Inventory• Investments• External reporting

Planning & Budgeting

• Accounting• Cost• Audit• Internal reporting

June 2007 DKH Enterprises, Inc. Business Advisors 3

DKH Enterprises, Inc. Cash Management

• Determine working capital needs– Sources of cash and policies/timing of receipts– Uses of cash:

• Inventory conversion cycle – time cash tied up/supplier terms

• Selling and marketing costs

• Overhead costs

– Timing/policies for cash payments

• Develop a Cash Budget• Accelerate cash conversion process

June 2007 DKH Enterprises, Inc. Business Advisors 4

DKH Enterprises, Inc. Developing a Cash Budget

• Determine the way in which cash flows through the business

• Build a model that incorporates realistic assumptions about how your business really works

• Track actuals to budget frequently in order to respond in an effective timeframe

• Build flexibility to adjust assumptions as business experience changes

June 2007 DKH Enterprises, Inc. Business Advisors 5

DKH Enterprises, Inc. Sources & Uses of Cash

Sources of Cash;• Cash from Sales

• Cash from Debt or Equity

• Cash from Investments

Uses of Cash:• Buy and convert raw materials

• Sell products

• Pay bills for overhead

• Long-term: pay off debt; expand (new products); contingencies

June 2007 DKH Enterprises, Inc. Business Advisors 6

DKH Enterprises, Inc. Cash from Sales

• % accounts receivable (AR) paid in cash (credit cards, wire transfers, etc.)

• Credit terms• % AR paid in 15, 30, 45, 60 days and so on• Isolate large account experience• % bad debt

June 2007 DKH Enterprises, Inc. Business Advisors 7

DKH Enterprises, Inc.Cash Needed for Operations

• Cost of goods– Supplier payment terms– Conversion costs:

• Labor• Co-packer• Shipping • Warehousing

– Cycle time

• Selling costs– Travel– Trade events– Sales materials– Promotions and programs

• G& A Expenses– Payroll– Rent/Utilities

• Pay off Debt• Invest in product development

June 2007 DKH Enterprises, Inc. Business Advisors 8

DKH Enterprises, Inc. Increase Cash Flow

• Speed Collections– Invoice ASAP– Offer incentives for early pay/prepay– Accept credit cards– Deposit checks, then enter– Inventory and PO financing

• Reduce Order Quantities/Cycle Time– Supplier lead-times– Transit times– Reduce finished goods inventory

• Slow Payments– Negotiate supplier terms– Use credit cards or other credit facility

June 2007 DKH Enterprises, Inc. Business Advisors 9

DKH Enterprises, Inc. Cash Conversion Cycle

1. Inventory conversion

2. Days sales outstanding

3. Payables deferral

4. Cash conversion cycle: days to convert raw materials and to receive cash from customers

June 2007 DKH Enterprises, Inc. Business Advisors 10

DKH Enterprises, Inc. Cash Conversion Measure

1. Inventory conversion = Inventory/Sales per Day

2. Days sales outstanding = Accounts receivable/

Sales per day

3. Payables deferral = Accounts Payable/

Cost of Goods Sold/365

Cash conversion cycle = (1+2)-3