Mind Cash Flow Managem ent

Philip Campbell

There Is A Hole In My Sidewalk

By Portia Nelson

Chapter 1
$ I walk down the street $ There is a deep hole in the $ $ $ $

sidewalk I fall in I am lost I am hopeless It isnt my fault It takes forever to find a way out

Chapter 2
$ I walk down the same street $ There is a deep hole in the $ $ $ $ $

sidewalk I pretend I dont see it I fall in again I cant believe I am in the same place But it isnt my fault It still takes a long time to get out

Chapter 3
$ I walk down the same street $ There is a deep hole in the sidewalk $ I see it is there $ I still fall in its a HABIT $ My eyes are open $ I know where I am $ It is my fault $ I get out immediately

Chapter 4
$ I walk down the same street $ There is a deep hole in the

sidewalk $ I walk around it

Chapter 5
$ I walk down another street

Our Focus Today

Cash Flow

Heres What You Will Learn Today

$ Why cash flow problems dont just

happen $ How to implement a tsunami warning system in your business $ The 4 keys to creating cash flow projections you can trust

Heres What You Will Learn Today

$ Two questions that will instantly tell

you whether you have the cash flow of your business under control $ A powerful tool for understanding and projecting your cash flow called the Peace of Mind schedule

A Different Perspective

Blah, Blah, Blah, Blah Blah, Blah

???

Accountant

Business Owner

Two simple questions will put you back in control of your cash

The 2 Critical Cash Flow Questions

1. What is my cash balance right now? 2. What do I expect my cash balance to be six months from now?

How Do You Define Cash Flow?

a. Revenues expenses b. EBITDA c. Net income + noncash expenses d. Cash receipts e. Cash disbursements

Cash receipts - disbursements g. None of the above h. All of the above

f.

Three Good Reasons to Focus on Cash

Failure Hurts!

The Definition of Failure in Business is

The Definition of Failure in Business is

Running Out of Cash!

All your hard work goes right down the toilet

Its Important to Understand the Destructive Impact of Worry

The Worry Cycle

1
Cash gets tight

The Worry Cycle

1 2
Worry sets in

The Worry Cycle

1 2 3
Youre role shifts

The Worry Cycle

1 2 3

Money may not buy happiness but it does buy

The BIG Problem

Survey Questions
Do you feel like you have your cash flow under control?
0 %

Cash Flow Answers

82% No
2% 0 4% 0 6% 0 8% 0 10 0%

Do you know what your cash balance will likely be 6 months from now?
0 % 2% 0

79% No
4% 0 6% 0 8% 0 10 0%

The BIG Problem

Survey Questions
Do you feel like you have your cash flow under control?
0 %

Cash Flow Answers

82% No
2% 0 4% 0 6% 0 8% 0 10 0%

Do you know what your cash balance will likely be 6 months from now?
0 % 2% 0

79% No
4% 0 6% 0 8% 0 10 0%

Why is Cash Flow Such a Mystery?

1. Many owners dont have accurate and timely financials 2. Belief that all you need are financial statements (especially the P&L)

Financial Statements Create ______________ ?

Statements Create Accountabilit y

Using Your Financials to Get What YOU Want!

1. What did I want to achieve? and 2. What actually happened?

It all starts with what you want to make happen

Make Changes to Achieve the Goal What Do I WANT to Happen?

What ACTUALLY Happened?

It all starts with what you want to make happen

Make Changes to Achieve the Goal What Do I WANT to Happen?

What ACTUALLY Happened?

It all starts with what you want to make happen

Make Changes to Achieve the Goal What Do I WANT to Happen?

What ACTUALLY Happened?

Financial Statements By Themselves Are Not Enough

The Myth

Not T ru
Profit or Loss

CASH FLOW

e!

Profits Vs. Cash

Net Income Change In Cash
Microsoft (2005) Microsoft (2009) Ford (2006) Ford (2009) $12.3 billion $14.6 billion Down ($9.5) billion Down ($4.3) billion

Loss ($12.6) billion Down ($0.5) billion $2.7 billion Down ($0.6) billion UP $400 thousand

Private company Loss ($5.5) million

Profit or Loss Other "Timing" Differences Accounts Receivable

Borrowings and Debt Service

CASH FLOW

Inventory

Capital Expenditures

Accounts Payable

Financial Statements Are Focused on the Past

Business Decisions Affect Cash Flow

$ Can I add another store? $ Can I/should I hire a manager or

staff? $ Can I pay my loan back on time? $ Will I have enough cash to get through the slow months? $ Can I buy the new equipment I need?

Cash Flow Problems Dont Just Happen

The punch that The punch that knocks you out is the knocks you out is the one you didnt see
one you didnt see
Champion
Joe Frazier, Boxing Champion

Joe Frazier, Boxing

How to Avoid a Cash Flow Problem

$ See the potential problem in

advance $ Define how much of a problem it will be (putting a dollar amount on the problem) $ Determine when it will likely arrive

Which Statement Will Help You Avoid a Cash Flow Problem?

$ Oh $#*&, I think I may be short of

cash sometime soon. Or

$ I expect to be $23,500 short of

cash 60 days from now.

You Absolutel y Positively Cannot Run a Business Intelligen tly Without Cash Flow Projectio ns

Lets grow really FAST

$ Double sales in month 2 $ Double them again in month 3 $ What happens to profitability? $ What happens to the cash?

Double Revenues in Month 2 and 3

3 Months No Growth Revenues Cost of goods sold Gross profit Total operating expense Operating income Interest expense Pretax income Income tax expense Net income $ $ 6,748,993 4,049,396 2,699,597 2,057,132 642,465 69,862 572,603 211,863 360,740 3 Months Rapid Growth $ 16,028,858 9,617,315 6,411,543 2,795,871 3,615,672 69,862 3,545,810 1,311,950 $ 2,233,860 Increase $ 9,279,865 5,567,919 3,711,946 738,739 2,973,207 0 2,973,207 1,100,087 $ 1,873,120

What Happened to the Cash Balance?

The P&L View
$ Revenues increased by

What did Cash do?

$ Up by $3.7 million $ Up by $2.9 million $ Up by $1.8 million $ Down by $738k $ Down by $1.2 million $ Down by $2.4 million $ Down by $4.1 million $ Down by $5.6 million

$9.3 million $ Gross profit increased by $3.7 million $ Operating income increased by $2.9 million. $ Net income increased by $1.8 million

And the Answer Is

The cash balance went DOWN by $4.1 million

The Peace of Mind Schedule

Peace of Mind Schedule

$ Shows your cash flow in an easy to

follow format (answers what happened to the cash) $ Its the key to taking control of your cash flow $ Its the perfect tool for creating cash flow projections (answers whats about to happen to the cash)

The Peace of Mind Schedule (page 1)

Actual Jan Beginning cash balance Section 1 Total sales Cost of good sold Gross profit Operating expenses Salaries and benefits Advertising and marketing Occupancy All other expenses 1,952,387 1,880,077 1,928,284 1,976,491 1,171,432 1,128,046 1,156,970 1,185,894 780,955 752,031 771,313 790,596 1,952,387 1,171,432 780,955 2,097,009 1,258,205 838,803 Actual Feb Actual Mar Actual Apr Actual May 17,432 $ Actual Jun 4,652 $ 110,235 $ 135,163 $ 139,906 $ 111,134 $

302,620 64,429 107,381 132,762 0 0 607,192 173,762

291,412 62,043 108,431 127,845 0 0 589,731 162,300

298,884 63,633 106,371 131,123 0 0 600,012 171,302

306,356 65,224 105,271 134,401 0 0 611,253 179,343

302,620 64,429 107,281 132,762 0 0 607,092 173,862

325,036 69,201 106,181 142,597 0 0 643,015 195,788

Total expenses EBITDA

The Peace of Mind Schedule (page 2)

Section 2 Debt Service (principal and interest) Note payable Line of credit Interest payment Owner investment Other Totals Actual Jan (16,546) (23,000) (21,397) 0 0 (60,942) Actual Feb (16,546) 0 (21,397) 0 0 (37,942) Actual Mar (16,649) 0 (21,294) 0 0 (37,942) Actual Apr (16,753) 150,000 (22,221) 0 0 111,026 Actual May (16,858) 0 (22,116) 0 0 (38,974) Actual Jun (16,963) 200,000 (23,386) 0 0 159,651

Section 3 Investments Leasehold improvements Fixtures and equipment Other Totals

0 0 0 0

0 (25,000) 0 (25,000)

0 0 0 0

0 (60,000) 0 (60,000)

0 0 0 0

0 0 0 0

Section 4 Other cash flow items and timing differences Less: revenues (1,952,387) Add: cash collected 1,991,435 Add: cost of goods sold 1,171,432 Less: inventory purchases (1,128,046) Estimated tax payments (160,326) Change in A/P & accrued liabilities 0 Distributions to owner (10,000) Other 0 Totals (87,892) Net cash flow 24,928

(1,880,077) 1,902,387 1,128,046 (1,181,970) 0 (53,000) (10,000) 0 (94,614) 4,744

(1,928,284) 1,830,077 1,156,970 (1,210,894) 0 0 (10,000) 0 (162,131) (28,772)

(1,976,491) 1,878,284 1,185,894 (1,196,432) (160,326) (45,000) (10,000) 0 (324,071) (93,702)

(1,952,387) (2,097,009) 1,926,491 1,952,387 1,171,432 1,258,205 (1,283,205) (1,373,902) 0 0 0 0 (10,000) (10,000) 0 0 (147,669) (270,318) (12,780) 85,121

Ending cash balance Minimum cash balance target Cash excess (shortfall)

$ 135,163 $ 22,000 $ 113,163

$ 139,906 $ 22,000 $ 117,906

$ 111,134 $ 22,000 $ 89,134

$ 17,432

4,652

89,773 22,000 67,773

$ 22,000 $ $ (4,568) $

22,000 $ (17,348) $

The Peace of Mind Schedule (page 1)

A c t u a l A c t u a l A c t u a l A c t u a l A c tu a l A c t u a l P r o j e c tP r o j e c tP rdo j e c tPe rdo j e c Perd j e c Perd j e c te d o j e c t e d ed e t o t o Pr Jan Feb Mar Apr May Jun Jul Aug Sep O ct Nov D e c F u ll Y e a r B e g in n in g c a sh b a la n c e S e c ti o n 1 T o ta l s a l e s C o st o f g o o d so ld G ro ss p ro fit O p e r a ti n g e x p e n s e s S a l a r i e s a n d b e n e fi t s A d v e rtisi n g a n d m a r k e tin g O ccupa ncy A l l o th e r e x p e n s e s 1 , 9 5 2 , 3 8 7 , 8 8 0 , 0 7 17 , 9 2 8 , 2 814, 9 7 6 , 4 9 1 , 9 5 2 , 3 8 2 , 0 9 7 , 0 0 9 1 7 1 , 1 7 1 , 4 3 2 , 1 2 8 , 0 4 16 , 1 5 6 , 9 710, 1 8 5 , 8 9 4 , 1 7 1 , 4 3 1 , 2 5 8 , 2 0 5 1 1 2 7 8 0 ,9 5 5 7 5 2 ,0 3 1 7 7 1 ,3 1 3 7 9 0 ,5 9 6 7 8 0 ,9 5 5 8 3 8 ,8 0 3 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1 1 ,7 8 6 ,6 3 4 0 0 7 ,0 7 1 ,9 8 0 4 ,7 1 4 ,6 5 4 $ 1 1 0 , 2 3$5 1 3 5 , 1 6$3 1 3 9 , 9 0$6 1 1 1 , 1 3$4 1 7 , 4 3 $ 2 4 , 6 5 2$ 8 9 , 7 7 $ 8 9 , 7 7 $ 8 9 , 7 7 $ 8 9 , 7 7 $ 8 9 , 7 7 $ 8 9 , 7 7 $ 1 1 0 , 2 3 5 3 3 3 3 3 3

30 2 ,62 0 6 4 ,4 2 9 10 7 ,38 1 13 2 ,76 2 0 0

2 9 1 ,4 1 2 6 2 ,0 4 3 1 0 8 ,4 3 1 1 2 7 ,8 4 5 0 0

2 9 8 ,8 8 4 6 3 ,6 3 3 1 0 6 ,3 7 1 1 3 1 ,1 2 3 0 0

3 0 6 ,3 5 6 6 5 ,2 2 4 1 0 5 ,2 7 1 1 3 4 ,4 0 1 0 0

3 0 2 ,6 2 0 6 4 ,4 2 9 1 0 7 ,2 8 1 1 3 2 ,7 6 2 0 0

3 2 5 ,0 3 6 6 9 ,2 0 1 1 0 6 ,1 8 1 1 4 2 ,5 9 7 0 0

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

1 ,8 2 6 ,9 2 8 3 8 8 ,9 5 9 6 4 0 ,9 1 8

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

0 0 0

0 2 ,8 5 6 ,8 0 5 1 ,8 5 7 ,8 4 9

T o ta l e x p e n s e s E B IT D A

6 0 7 ,1 9 2 5 8 9 ,7 3 1 6 0 0 ,0 1 2 6 1 1 ,2 5 3 6 0 7 ,0 9 2 6 4 3 ,0 1 5 1 7 3 ,7 6 2 1 6 2 ,3 0 0 1 7 1 ,3 0 2 1 7 9 ,3 4 3 1 7 3 ,8 6 2 1 9 5 ,7 8 8

The Peace of Mind Schedule (page 2)

S e c tio n 2 A c tu a l A c tu a l D e b t S e rv i c e (p rin c ip a l a n d in te re st)J a n Feb N o te p a y a b le (1 6 ,5 4 6 ) (1 6 ,5 4 6 ) L i n e o f c re d i t (2 3 ,0 0 0 ) 0 In te re st p a y m e n t (2 1 ,3 9 7 ) (2 1 ,3 9 7 ) O w n e r in v e stm e n t 0 0 O th e r 0 0 T o ta ls (6 0 ,9 4 2 ) (3 7 ,9 4 2 ) S e c tio n 3 In v e stm e n ts L e a se h o ld im p ro v e m e n ts F i x tu re s a n d e q u ip m e n t O th e r T o ta ls A c tu a l A c tu a l A c tu a l A c tu a l P ro je c te d ro j e c te dP ro j e c te d P ro je c te d P ro j e c te d P ro je c te d P ro je c te d P Mar Apr May Jun Jul Aug Sep O ct Nov De c F u ll Y e a r (1 6 , 6 4 9 ) (1 6 ,7 5 3 ) (1 6 ,8 5 8 ) (1 6 ,9 6 3 ) (1 7 , 0 6 9 ) (1 7 ,1 7 6 ) (1 7 ,2 8 3 ) (1 7 ,3 9 1 ) (1 7 ,5 0 0 ) (1 7 ,6 0 9 ) (2 0 4 , 3 4 2 ) 0 1 5 0 ,0 0 0 0 2 0 0 ,0 0 0 2 7 5 , 0 0 0 (1 5 0 ,0 0 0 ) (3 5 0 ,0 0 0 ) 0 (1 5 0 ,0 0 0 ) (2 2 0 ,0 0 0 ) (2 6 8 , 0 0 0 ) (2 1 , 2 9 4 ) (2 2 ,2 2 1 ) (2 2 ,1 1 6 ) (2 3 ,3 8 6 ) (2 5 , 1 7 0 ) (2 4 ,0 3 2 ) (2 0 ,6 5 9 ) (2 0 ,5 5 1 ) (2 0 ,4 4 3 ) (2 0 ,3 3 3 ) (2 6 2 , 9 9 9 ) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (3 7 , 9 4 2 ) 1 1 1 ,0 2 6 (3 8 ,9 7 4 ) 1 5 9 ,6 5 1 2 3 2 , 7 6 1 (1 9 1 ,2 0 8 ) (3 8 7 ,9 4 2 ) (3 7 ,9 4 2 ) (1 8 7 ,9 4 2 ) (2 5 7 ,9 4 2 ) (7 3 5 , 3 4 1 )

0 0 0 0

0 (2 5 ,0 0 0 ) 0 (2 5 ,0 0 0 )

0 0 0 0

0 (6 0 ,0 0 0 ) 0 (6 0 ,0 0 0 )

0 0 0 0

0 0 0 0

0 0 0 0

0 0 0 0

0 0 0 0

0 0 0 0

0 0 0 0

0 0 0 0

0 (8 5 ,0 0 0 ) 0 (8 5 ,0 0 0 )

S e c tio n 4 O th e r c a sh flo w i te m s a n d tim in g d iffe re n c e s L e ss: re v e n u e s (1 ,9 5 2 , 3 8 7 )(1 ,8 8 0 , 0 7 7 ) , 9 2 8 ,2 8 (1),9 7 6 ,4 9 1 ()1 ,9 5 2 ,3 8 7 )( 2 , 0 9 7 ,0 0 (2),2 8 9 , 8 3 7 ) , 3 8 6 , 2 5 1 )(2 ,0 7 2 ,9 0 5 )(1 , 9 0 4 ,1 8 0(1 ,9 2 8 ,2 8 4 )(1 ,7 3 5 ,4 5 5 ) 2 4 ,1 0 3 ,5 4 6 ) (1 4 9 (2 ) ( A d d : c a sh c o ll e c te d 1 ,9 9 1 , 4 3 5 1 ,9 0 2 , 3 8 71 ,8 3 0 ,0 7 71 , 8 7 8 ,2 8 4 1 ,9 2 6 ,4 9 1 1 ,9 5 2 ,3 8 72 , 0 9 7 , 0 0 92 ,2 8 9 ,8 3 7 2 ,3 8 6 ,2 5 1 2 ,0 7 2 , 9 0 5 1 ,6 5 4 ,1 8 0 1 ,8 7 8 ,2 8 4 2 3 ,8 5 9 ,5 2 6 A d d : c o st o f g o o d s so l d 1 ,1 7 1 , 4 3 2 1 ,1 2 8 , 0 4 61 ,1 5 6 ,9 7 01 , 1 8 5 ,8 9 4 1 ,1 7 1 ,4 3 2 1 ,2 5 8 ,2 0 51 , 3 7 3 , 9 0 21 ,4 3 1 ,7 5 1 1 ,2 4 3 ,7 4 3 1 ,1 4 2 , 5 0 8 1 ,1 5 6 ,9 7 0 1 ,0 4 1 ,2 7 3 1 4 ,4 6 2 ,1 2 8 L e ss: i n v e n to ry p u rc h a se s (1 ,1 2 8 , 0 4 6 )(1 ,1 8 1 , 9 7 0 ) , 2 1 0 ,8 9 (1),1 9 6 ,4 3 2 ()1 ,2 8 3 ,2 0 5 )( 1 , 3 7 3 ,9 0 (1),4 3 1 , 7 5 1 ) , 2 4 3 , 7 4 3 )(1 ,1 4 2 ,5 0 8 )(1 , 1 5 6 ,9 7 0(1 ,3 9 1 ,2 7 3 )(1 ,0 4 1 ,2 7 3 ) 1 4 ,7 8 1 ,9 6 8 ) (1 4 2 (1 ) ( E stim a te d ta x p a y m e n ts (1 6 0 ,3 2 6 ) 0 0 (1 6 0 ,3 2 6 ) 0 0 (1 6 0 ,3 2 6 ) 0 0 (1 6 0 ,3 2 6 ) 0 0 (6 4 1 , 3 0 6 ) C h a n g e in A /P & a c c ru e d lia b ilitie s 0 (5 3 ,0 0 0 ) 0 (4 5 ,0 0 0 ) 0 0 0 0 0 0 0 0 (9 8 ,0 0 0 ) D istri b u tio n s to o w n e r (1 0 ,0 0 0 ) (1 0 ,0 0 0 ) (1 0 , 0 0 0 ) (1 0 ,0 0 0 ) (1 0 ,0 0 0 ) (1 0 ,0 0 0 ) (1 0 , 0 0 0 ) (1 0 ,0 0 0 ) (1 0 ,0 0 0 ) (1 0 ,0 0 0 ) (1 0 ,0 0 0 ) (1 0 ,0 0 0 ) (1 2 0 , 0 0 0 ) O th e r 0 0 0 0 0 0 0 0 0 0 0 0 0 T o ta ls (8 7 ,8 9 2 ) (9 4 ,6 1 4 ) (1 6 2 ,1 3 1 )(3 2 4 ,0 7 1 ) (1 4 7 ,6 6 9 ) (2 7 0 ,3 1 8 )(4 2 1 ,0 0 3 ) 8 1 ,5 9 3 4 0 4 ,5 8 1 (1 6 ,0 6 4 ) (5 1 8 ,4 0 7 ) 1 3 2 ,8 2 8 (1 ,4 2 3 ,1 6 7 ) N e t c a sh fl o w 2 4 ,9 2 8 4,744 (2 8 , 7 7 2 ) (9 3 ,7 0 2 ) (1 2 ,7 8 0 ) 8 5 ,1 2 1 5 0 ,2 0 3 1 4 9 ,2 7 1 2 0 9 ,0 9 4 1 0 2 , 6 8 0 (5 4 4 ,5 5 3 ) (4 ,1 9 8 ) (5 7 ,9 6 5 )

E n d i n g c a sh b a la n c e M in im u m c a sh b a la n c e ta rg e t C a sh e x c e ss (sh o rtfa l l)

$ 1 3 5 ,1 6 3$ $ 2 2 ,0 0 0 $ $ 1 1 3 ,1 6 3$

1 3 9 ,9 0 6$ 1 1 1 ,1 3 4$ 1 7 ,4 3 2 $

4 ,6 5 2 $

8 9 ,7 7 3 $ 1 3 9 , 9 7 6$ 2 8 9 ,2 4 6$ 2 2 ,0 0 0 $ 2 2 ,0 0 0 $ 2 2 ,0 0 0 $ 6 7 ,7 7 3 $ 1 1 7 , 9 7 6$ 2 6 7 ,2 4 6$

4 9 8 ,3 4 1$ 2 2 ,0 0 0 $ 4 7 6 ,3 4 1$

6 0 1 , 0 2 1$ 2 2 ,0 0 0 $ 5 7 9 , 0 2 1$

5 6 ,4 6 8 $ 2 2 ,0 0 0 $ 3 4 ,4 6 8 $

5 2 ,2 7 0 $ 2 2 ,0 0 0 $ 3 0 ,2 7 0 $

5 2,270 2 2,000 3 0,270

2 2 ,0 0 0 $ 2 2 ,0 0 0 $ 2 2 ,0 0 0 $ 2 2 ,0 0 0 $ 1 1 7 ,9 0 6$ 8 9 ,1 3 4 $ (4 , 5 6 8 )$ (1 7 ,3 4 8 $ )

Creating Cash Flow Projections You Can Trust

Ive got a clean slate Now Im ready to create my cash flow projectio ns, right??

Creating Cash Flow Projections You Can Trust

$ The near future almost always

looks a lot like the recent past

Rule #2 consider what is changing

Rule #3 - Be conservative

Rule #4 - Use the Smell Test

Understand the Peak and Trough Cash Months

Cash Balance (Service Company) Dollars in Thousands
1,200 1,000 800 Dollars 600 400 200 0 1 2 3 4 5 6 7 Months 8 9 10 11 12 13

How Do You Define Cash Flow?

a. Revenues expenses b. EBITDA c. Net income + noncash expenses d. Cash receipts e. Cash disbursements

Cash receipts - disbursements g. None of the above h. All of the above

f.

It All Boils Down to This

$ Know what happened to the cash $ AND know whats about to happen

to the cash

Questions?

Here Are Your Next Steps

$ $ $

Download the Peace of Mind schedule at NeverRunOutOfCash.com/freetools.htm Get the Cash is King FREE email newsletter. Feel free to contact me with questions at 713 962 1646 or at pcampbell@pdq.net.

Good Luck Growing An Awesome Business