Welcome to Financial Series #3The Cash Flow Forecast

Your Hosts for Today’s Conference are:Gary Elekes in Nashville, Tennessee

Gary Oetker in Plano, Texas

Conference Objectives: Review Cash Flow Forecast fundamentals.

Review the key components of the Cash Flow Forecast and learn how to generate one.

Review the importance of the Cash Flow Forecast in the financial management of a business.

Review the difference between profit and cash flow.Review how profitable companies can become insolvent.Review the Cash Flow Forecast equation.Review Cash Inflow and the impact of Accounts Receivable. Review Cash Outflow as it occurs in cost of sales, operating costs and balance sheet implications.Review things that negatively affect cash flow.

Agenda for Conference

More businesses fail for lack of cash than for want of profit

Cash is the life-blood of a business. Without it the business dies.

The key challenge of any business is keeping more cash coming in than is going out

A Cash Flow Forecast is an important tool to control the financial aspects of a

business

Cash Is King!

Many contractors do not think about cash needs until after they are overextendedMay become past due with suppliersMay have problems making payrollTo try to borrow money in a frantic need is usually always a bad idea

Banks are less likely to loan money when a business is overextended

Getting Into Trouble

Most businesses equate success with sales volume and profit A business can become insolvent in the middle of its best year in terms of sales

and profits!Be very careful of cash flow where the business is growing rapidly. Working Capital is needed to fund growth.

Getting Into Trouble (cont)

ProfitLooks at revenue and expenses over a certain period of time

Cash Flow Looks at movement of money in and out of business

Cash Flow Versus Profit

Cash Inflow Often Lags the SaleINCOME STATEMENT Month 1

Sales 5,000Cost of Sales 3,000Gross Profit 2,000

Cashflows Relating to Month 1 Month 1 Month 2 Month 3 Total

Receipts From Sales 2,000 2,000 2,000 6,000Employee Wages & Fringes 900 0 0 900Payments to Suppliers 1,920 0 0 1,920Other Direct Costs 780 0 0 780Net Cash Flow -1,600 2,000 2,000 2,400Cumulative Net Cash Flow -1,600 400 2,400 2,400Note - This example does not consider overhead expenses.

It’s the owner’s/general managers responsibility to monitor, measure, invest, borrow and collect enough money to operate the businessManagement should predict future income and expenditures through budgeting and forecasting Management should anticipate the cash needed to

sustain the operation. Management must arrange financing for cash flow short fallsManagement should arrange short term investments for

temporary cash flow surpluses

Management & Cash Flow

Starting Cash Balance

Plus Projected Cash Inflows

Minus Projected Cash Outlays

Equals Ending Cash Balance A negative cash position is a shortfall or gap A positive cash position is called free cash or

cash surplus

Cash Flow Forecast Equation

Cash Inflow Cash Sale Collection on Receivables Borrowed Funds Sale of Assets Investment Income Additional Input of Owner

Equity

Cash Inflow & Outflow

Cash Outflow•Paying Employee Wages•Purchasing Materials for Jobs or inventory•Operating Costs (Overhead Expenses) •Paying Back Loans•Cash Spent on Capital Expenditures•Paying Taxes•Owner Equity Withdrawn

Examples

A Cash Flow Forecast can be budgeted on a weekly, monthly, quarterly or yearly basisIt should be performed more frequently for businesses with peaks and valleys in revenueIt’s also critical for businesses were customer payments may be delayedFor new companies or ones with cash flow problems, the forecast should be done monthly

How Often Should It Be Done?

Cash Sales Service Agreement Receipts (paid) Cash Receipts from Financing VendorsCurrent Receivables Collected – Cash Receipts

Receivable Collected 31-60 Days Receivable Collected 61-90 Days Receivable Collected 91-120 Days Receivable Collected Over 121 Days

Retainage CollectedLoan Payments ReceivedInterest IncomeWarranty Return Credits from Vendors

Cash Inflow - Detail

Account for A/R aging .in your planning.Use history as a guideto collections

Accounts Receivable Aging

Vendor Payment Equipment (payables)Vendor Payment Parts & Material (payables)Payroll and all Wages/CommissionsSub-Contractor Costs3rd Party Extended Warranty CostsBuydown/Financing CostsPermitsOther Direct Cost

Cash Outflow – DetailCost of Sales

All Other Payroll and WagesPayroll TaxesWorker’s Compensation InsuranceGroup Medical Insurance401K Employer ContributionSelf Funded Workers Comp

Cash Outflow – DetailOperating Costs

- All Other Overhead Line ItemAccounts on Income Statement

- Less Depreciation

Payment for Accrued Liabilities (reserves)Payments for Capital ExpendituresLoan Principle PaymentOwner’s WithdrawalOther Cash Outlays

Cash Outflow – DetailBalance Sheet Implications

Excess InventoryCredit Policy

Require Down Payment on Jobs, Balance Due Upon Completion

COD on Residential Service Calls

Accounts ReceivablePoor Collection Processes

Credit Terms

Things That Negatively Affect Cash Flow

External Financing SourcesRevolving Lines of CreditBank LoansTrade CreditBring Additional Equity Into Business

Be Very Careful When Taking Profits Out of the Business. Profits Provide the

Working Capital for Growth.

Filling Cash Flow Gaps

Cash Flow Forecast Tool – InflowCash Flow Budget Projection - Cash Profit & Loss

Description of Activity Begin Cash Nov Dec15-Nov

Beginning Balance of Cash/Carry Forward 150,000$ 150,000$ 135,655$ Cash Sales - Over the Counter -$ -$ Service Agreement Receipts(Paid) -$ -$ Cash Receipts from Financing Vendors -$ -$ Current Receivables Collected - Cash Receipts -$ 15,480$ Receivables Collected 31-60 Days -$ -$ Receivables Collected 61-90 Days -$ -$ Receivables Collected 91-120 -$ -$ Receivables Collected over 121 Days -$ -$ Retainage Collected -$ -$ Loan Payments Received -$ -$ Interest Income -$ -$ Warranty Return Credits from Vendors -$ -$ Total Cash Income 150,000$ 151,135$

Cash Flow Forecast Tool – OutflowCash DisbursementsVendor Payment Equipment(Payables) 7,500$ -$ Vendor Payment Parts & Materials(Payables) -$ 12$ Payroll and All Wages/Commissions 2,730$ 5,968$ Payroll Taxes -$ -$ Payment for Accrued Liabilities(Reserves) -$ -$ Payments for Capital Expenditures -$ -$ Loans Granted -$ -$ Payments to Subcontractors -$ 325$ Advertising-Yellow Pages -$ -$ Advertising-Direct Mail -$ -$ Advertising-Newspaper -$ -$ Advertising-Radio -$ -$ Advertising-Television -$ -$ Advertising-Telemarketing -$ -$ Advertising-Other - Home Show/Marketing Materials -$ -$ Workers' Compensation /Auto/Gen. Liability Insurance. -$ 2,554$ Group Medical Insurance -$ 757$ 401(k) Employer Contribution -$ -$ Self Funded Workers Comp -$ -$ Uniforms -$ -$ Employee Relations -$ -$ Drug Testing expense -$ -$ Hiring expense -$ -$ Small Tools Expense -$ 860$ Education expense -$ -$ Building Maintenance & Repairs -$ -$ Shop Supplies -$ -$ Equipment Maintenance & Repairs -$ -$ Equipment Rental -$ -$ Rent -$ -$ Utilities -$ -$ Telephone and Internet Provider -$ 193$ Janitorial expense -$ -$ Property Taxes -$ -$ Vehicle Repair & Maintenance -$ -$ Vehicle Fuel -$ 86$ Vehicles-Licenses & Registration -$ -$ Vehicle Lease/Expenses -$ -$ Auto Lease/Monthly Payment -$ -$ Permits & Licenses 100$ 445$ Security Expense -$ -$ Accounting/Auditor expense -$ -$ Legal expense -$ -$ Collections expense -$ -$ Dues & Subscriptions/Builders -$ -$ Investments in Industry Clubs/Builders/Real Estate 865$ -$ Data Processing -$ -$ Postage 22$ -$ Office Supplies -$ 60$ Printing Expense -$ -$ Radio & Pager expense -$ -$ Cellular Phone expense -$ -$ Bank & Credit Card fees 116$ -$ Travel & Entertainment -$ -$ Travel & Entertainment-meals -$ -$ Mileage Reimbursement -$ -$ Contributions -$ -$ Computer Hardware/Software Expenses 3,012$ -$

Total Cash Disbursed - Flowing Out -$ 14,345$ 11,260$

Total Cash Disbursed - Flowing Out -$ 14,345$ 11,260$ Net Cash Available for Operations (Free Cash) 150,000$ 135,655$ 139,875$

Loan Required/Bank Line of Credit None Required None RequiredBank Loan Amount if Any Required -$ -$

Net Cash at End of Period to Carry Forward 150,000$ 135,655$ 139,875$

Positive Net CashIndicates a Surplus

Negative Net CashIndicates a Shortage

Make sure you are realistic about cash inflow (money not promises)

Be realistic in terms of sales and cost of sales projections (avoid being too optimistic in terms of generating sales or keeping direct costs low)

It’s useful to prepare “best case” and “worst case plansInvolve your people in this planning process

Words of Advice

Summarizes the Impact of all Activities on the Business

Shows How Much Money is Required at Any Given Time to Finance all Activities

Gives an Early Warning of Cash Flow Gaps so Management Can Readily Adapt

Gives Confidence to Outsiders Who Might Be Called Upon To Assist In Financing

Cash Flow Forecast

Do not expect to be perfect when you start. Here

are some things to help you get better:If you do not have the information in the beginning,

make your best assumptionsReview the actual results for the month against the forecastReview any significant varianceUpdate the forecast to reflect new activities that will affect cash flow

Keep at it!

You’ll Get Better At It

That’s A Subject for Another

Coaching Conference

Cash Management

Questions

&

Answers