Transcript How can I make a profit and still run out of cash?

HOW CAN I MAKE A PROFIT
AND STILL RUN OUT OF
CASH?
Cash Management
Foundations Update

…and the market will continue to be competitive
 More
products
 More aggressive
 More options
Round 1
Round 2
Plus:
• A??
• Bold
• Cent
• Dabble
• East
• Feast
Now Many Products ?
The story thus far…

Key points of strategy:
 Product
characteristics
 positioning

matching ideal spot - critical in High Tech segment
 Margin
 pricing
not high enough
 costs not low enough



automation too low
low tech positioning too aggressive
MTBF too high
The story thus far…
 Sales
forecasts
 possibly

not accounting for lag in product introduction
may need to plan for full-scale product demand in 2 years – not 1
 Liquidation
 older
products?
 Products
 developing
new products v. repositioning current products a
viable strategy? What are the trade-offs?
 Cash
management
 running
out of cash & making a profit?
Business Activities
Your Cash Management decisions:
Operating: using $
1.

create goods /services/ exchanges
Investing: what do you do with $
2.


acquire assets (stuff) to run a business
loan $ to others (who earn higher return)
Financing: where do you get $
3.


funds to start and grow a business
debt / equity / retained earnings
What Is Working Capital?

Working capital



Cash a business requires for day-to-day operations
Financing the conversion of raw materials into finished goods
So Why Do WE
On the Balance Sheet,
RunWorking
Out Of Capital shows up as:
Current Assets Money?
- Current Liabilities
(cash, inventory, accounts receivable)

(accounts payable)
Analysts look at these items for signs of a company's
efficiency and financial strength.
1. Failure to Finance
Operating

Working Capital and Cash Flow
Accounts
Payable
Raw
Materials
Cash
Accounts
Receivable
Inventory
Sales
If you turn a lot of cash
into inventory
but, less inventory back into cash (a lot
of inventory left over)
you run out of cash (its in the warehouse waiting to be changed back)
2. Product Availability
jan feb mar april may june july aug sept oct nov dec
Produce 600 in a year…with 1 shift
75
50
75
50 75
50
75
50
75
50
75
50
75
50
75
50
75
50
75
50
75
50
75
50
50
50
50 50
50
Produce 1200 in a year…with 2 shifts
50
50 50
50
50
50
50
July 15th Announcement date from R&D
Product Availability
3. Poor Forecasting
Primary
Segment
Name
Able
Awesom
Units Units in
Sold Inventory
Low 1,483
High
424
Money Spent
Revision
Date
424 13-Jan-14
499 19-Apr-14
Age
Pfmn
MTBF
Dec.31
Coord
2.9
1.5
19000
19000
6.3
8.9
Size
Coord
13.5
11.9
Price
$34.90
$44.95
Material
Cost
$10.51
$14.75
Units * (Labor + Material) = Product Cost
424,000 * $23.64 =
$10,023,360
499,000 * $26.12 =
$13,033,880
$23,057,240
Inventory * Sales Price = Potential Revenue
Revenue Not
Yet Received
424,000 * $34.90 =
499,000 * $44.95 =
$14,797,600
$22,430,050
$37,227,650
Labor
Cost
$13.13
$11.37
Contr
Marg.
29%
31%
Inventory

Too little inventory



Too much inventory




sell all the sensors you make ==> Stock Out
lost sales & opportunities
inventory is expensive- it ties up cash
product “ages” and is less desirable
reduces future year production resulting in laying off workforce
Just right


1 or more units left
less than 60 days (production scheduled/6)
Balance Sheet
ASSETS
Cash
Accounts Receivable
Inventory
Total Current Assets
Plant & Equipment
Accumulated Depreciation
Total Fixed Assets
$29,570
2014
Common Size
0.0%
6.3%
25.7%
32.0%
$0
$6,657
$16,058
$22,715
$62,751
86.5%
-18.6%
68.0%
$53,570
($11,813)
$41,757
$92,321
100.0%
$64,471
$47,725
4.9%
20.7%
26.1%
51.7%
$5,609
$5,303
$17,833
$28,745
$44,596
24.7%
23.6%
48.3%
$12,823
$22,902
$35,725
$92,321
100.0%
$64,471
$0
$5,820
$23,750
$79,890
($17,139)
Total Assets
2013
Operating
Working Capital
LIABILITIES & OWNER'S EQUITY
Accounts Payable
Current Debt
Long Term Debt
Total Liabilities
$4,509
$19,116
$24,100
Common Stock
Retained Earnings
Total Equity
$22,823
$21,773
Total Liabilities and Owner's Equity
Operating
Working Capital
Selected Financial Statistics
Andrews
Baldwin
Chester
Digby
Erie
Ferris
-1.6%
8.4%
7.4%
9.7%
3.5%
7.6%
0.77
1.34
1.18
1.39
1.27
1.66
-1.2%
11.2%
8.7%
13.6%
4.5%
12.6%
2.1
2.1
2.0
2.0
2.2
2.0
-2.5%
23.2%
17.3%
27.2%
9.7%
25.3%
Emergency Loan
$17,382,870
$0
$0
$0
$0
$0
Sales
$70,812,056
$80,395,503
$63,484,031
$77,976,500
$55,686,990
$65,566,437
EBIT
$3,567,596
$13,347,824
$9,936,972
$14,472,966
$5,326,078
$9,575,620
Profits
($1,129,822)
$6,727,111
$4,666,587
$7,592,728
$1,956,735
$4,992,385
Cumulative Profit
$13,735,874
$24,261,851
$14,122,476
$25,205,039
$11,348,149
$14,839,392
SG&A % Sales
12.4%
9.9%
9.7%
10.6%
9.9%
13.1%
Contrib. Margin %
29.4%
34.0%
38.8%
35.0%
33.9%
36.1%
ROS
Turnover
ROA
Leverage
ROE
Where is the Working Capital?

Cash has been depleted from last year



Accounts payable increased


It was eaten up by inventory – a result of poor sales forecasting
Carrying costs
Partially offsets high inventory levels
(it is like an interest free loan from vendors)
Current Debt has increased by $19,116,000


If sales are increasing and need to fund inventory and accounts
receivables (current assets), this may be justified.
It is not a good idea to fund long term assets (plant and equipment)
with short term debt, because it could take years for this investment
to pay off.
Business Activities
Your Cash Management decisions:
1.
2.
3.
Operating: using $
create goods /services/ exchanges
Investing: what do you do with $
acquire assets (stuff) to run a business
renting $ to others (who earn higher return)
Financing: where do you get $
funds to start and grow a business (debt / equity
/ retained earnings)
Investing

Create the company you want to run?




Build a new factory?
Increase capacity for a current product?
Increase Automation?
All will increase Plant & Equipment…


Any increase in the value of plant and equipment is a long term
investment in your company
You should generate the funds from – Long term sources:
 Retained earnings
 Bonds
 Stock
Balance Sheet
ASSETS
Cash
Accounts Receivable
Inventory
Total Current Assets
Plant & Equipment
Accumulated Depreciation
Total Fixed Assets
$0
$6,657
$16,058
$22,715
Operating
Working Capital
$29,570
2014
Common Size
0.0%
6.3%
25.7%
32.0%
$53,570
($11,813)
$41,757
Investing
$62,751
86.5%
-18.6%
68.0%
$92,321
100.0%
$64,471
$47,725
4.9%
20.7%
26.1%
51.7%
$5,609
$5,303
$17,833
$28,745
$44,596
24.7%
23.6%
48.3%
$12,823
$22,902
$35,725
$92,321
100.0%
$64,471
$0
$5,820
$23,750
$79,890
($17,139)
Total Assets
2013
LIABILITIES & OWNER'S EQUITY
Accounts Payable
Current Debt
Long Term Debt
Total Liabilities
$4,509
$19,116
$24,100
Common Stock
Retained Earnings
Total Equity
$22,823
$21,773
Total Liabilities and Owner's Equity
Operating
Working Capital
Business Activities
Your Cash Management decisions:
1.
2.
3.
Operating: using $
create goods /services/ exchanges
Investing: what do you do with $
acquire assets (stuff) to run a business
renting $ to others (who earn higher return)
Financing: where do you get $
funds to start and grow a business (debt / equity
/ retained earnings)
Financing
Funds to grow & operate



Borrow- issue bonds
Take on owners- Issue stock
Reinvest profits- increase retained earnings
Extra cash (no investments to make)



retire bonds (lower interest payments)
retire stock (only if stock price is low)
pay dividend - (increase stock price)

Give the money back to rightful owners if you don’t have
anything better to do with it
Financing…
Put your worst case scenario in Marketing’s Unit
Sales Forecast
 Finance long term investments with long term options
(stock or bonds)
 Cover operating expenses with short term loans
 Ending cash position target

3.5% and 7% of total assets
Balance Sheet
ASSETS
Cash
Accounts Receivable
Inventory
Total Current Assets
Plant & Equipment
Accumulated Depreciation
Total Fixed Assets
$0
$6,657
$16,058
$22,715
Operating
Working Capital
$29,570
2014
Common Size
0.0%
6.3%
25.7%
32.0%
$53,570
($11,813)
$41,757
Investing
$62,751
86.5%
-18.6%
68.0%
$92,321
100.0%
$64,471
$47,725
4.9%
20.7%
26.1%
51.7%
$5,609
$5,303
$17,833
$28,745
$44,596
24.7%
23.6%
48.3%
$12,823
$22,902
$35,725
$92,321
100.0%
$64,471
$0
$5,820
$23,750
$79,890
($17,139)
Total Assets
2013
LIABILITIES & OWNER'S EQUITY
Accounts Payable
Current Debt
Long Term Debt
Total Liabilities
$4,509
$19,116
$24,100
Common Stock
Retained Earnings
Total Equity
$22,823
$21,773
Total Liabilities and Owner's Equity
Operating
Working Capital
Financing
Cash Flow Statement
Cash Flows from Operating Activities
Net Income (Loss)
Adjustment for non-cash items
Depreciation
Extraordinary gains/losses/writeoffs
Change in Current Assets and Liabilities
Accounts Payable
Inventory
Accounts Receivable
Net cash from operations
2014
($1,130)
2013
$5,218
$5,326
$0
$3,571
$0
($1,101)
($7,692)
$837
($3,760)
$1,488
($15,149)
($1,057)
($5,928)
($26,320)
($19,940)
$0
$10,000
$0
$0
$7,000
$0
$8,000
($1,733)
$13,813
$30,080
$9,000
$0
$4,436
$20,436
Net change in cash position
$0
($5,432)
Closing cash position
$0
$0
Cash Flows From Investing Activities
Plant Improvements
Cash Flows from Financing Activities
Dividends Paid
Sales of Common Stock
Purchase of Common Stock
Cash from long term
debt
Retirement of long term debt
Change in current debt (net)
Net cash from financing activities
Profit
Too much inventory
Increased Production
Issue Stock
Issue Bonds
Emergency Loan
Cash Flow Statement
Cash Flows from Operating Activities
Net Income (Loss)
Adjustment for non-cash items
Depreciation
Extraordinary gains/losses/writeoffs
Change in Current Assets and Liabilities
Accounts Payable
Inventory
Accounts Receivable
Net cash from operations
2014
($1,130)
$5,326
$0
($1,101)
($7,692)
$837
($3,760)
Cash Flows From Investing Activities
Plant Improvements
($26,320)
Cash Flows from Financing Activities
Dividends Paid
Sales of Common Stock
$0
$10,000
Purchase of Common Stock
Cash from long term debt
Retirement of long term debt
Change in current debt (net)
Net cash from financing activities
$0
$8,000
($1,733)
$13,813
$30,080
Net change in cash position
$0
Closing cash position
$0
Too much inventory
And
A huge investment
In plant and
equipment
Too little
Long term
financing
And you
Take an
Emergency loan
Income Statement
Product Name
Sales
Variable Costs
Direct Labor
Direct Material
Inventory Carry
Total Variable Costs
Contribution Margin
Period Costs
Depreciation
SG&A: R&D
Promotions
Sales
Admin
Total Period Costs
Net Margin
Able
$51,744
Awesom
$19,068
2013 Common
Total
Size
$70,812 100.0%
$19,131
$16,514
$1,223
$36,868
$14,876
$4,948
$6,569
$1,627
$13,144
$5,924
$24,078
$23,084
$2,850
$50,012
$20,800
34.0%
32.6%
4.0%
70.6%
29.4%
$23,649
$29,451
$1,927
$55,027
$25,966
$2,400
$35
$1,400
$1,800
$1,185
$6,820
$8,056
$2,926
$300
$1,800
$1,800
$437
$7,263
($1,338)
$5,326
$335
$3,200
$3,600
$1,621
$14,083
$6,718
7.5%
0.5%
4.5%
5.1%
2.3%
19.9%
9.5%
$3,571
$554
$3,600
$3,600
$3,021
$14,347
$11,619
$3,150
$3,568
$2,796
$2,510
($608)
$0
($1,130)
4.4%
5.0%
3.9%
3.5%
-0.9%
0.0%
-1.6%
$800
$10,819
$766
$1,862
$2,867
$106
$5,218
Other
EBIT
Short Term Interest
Long Term Interest
Taxes
Profit Sharing
Net Profit
2014
$80,993