Managing Cash Flow by Operational Excellence Consulting

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Cash flow is the flow of money in and out of the business. Managing your cash flow is vital for business survival and growth, even if you have existing cost savings programs in your organization. To run your business effectively, you need to balance the timing and amount of your expenses with those of your income. This training presentation explains the various areas you need to consider when managing and improving cash flow in your business. ​ LEARNING OBJECTIVES: 1. Explain what cash flow means 2. Understand the cash flow cycle and importance of cash flow to a business 3. Identify major causes of cash flow problems 4. Define strategies to improve cash flow 5. Gain knowledge on eliminating waste to improve cash flow 6. Learn how to forecast cash flow CONTENTS: 1. Introduction to cash flow 2. Causes of cash flow problems 3. Strategies to improve cash flow 4. Improving cash flow through waste elimination 5. Cash flow forecasting To download this complete presentation, please visit: http://www.oeconsulting.com.sg

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PowerPoint Presentation:

Managing Cash Flow

Learning Objectives:

Learning Objectives Explain what cash flow means Understand the cash flow cycle and importance of cash flow to a business Identify major causes of cash flow problems Define strategies to improve cash flow Gain knowledge on eliminating waste to improve cash flow Learn how to forecast cash flow NOTE: This is a PARTIAL PREVIEW . To download the complete presentation, please visit: http:// www.oeconsulting.com.sg

Program Outline:

Program Outline Introduction to cash flow Causes of cash flow problems Strategies to improve cash flow Improving cash flow through waste elimination Cash flow forecasting

Introduction:

Introduction Managing your cash flow is vital for business survival and growth To run your business effectively, you need to balance the timing and amount of your expenses with those of your income This guide explains the various areas you need to consider when managing and improving cash flow in your business

What is Cash Flow?:

What is Cash Flow? Cash flow is the flow of money in and out of the business A business needs cash Gives ‘immediate spending power’ Needed to pay bills and expenses such as rent, taxes, wages, suppliers etc. Without enough cash in the business, bills cannot be paid and the firm will be forced out of business

What is Cash Flow?:

What is Cash Flow? Negative cash flow This occurs when your cash outflow is greater than your incoming cash. This generally spells trouble for a business, but there are steps you can take to remedy the situation and generate or collect more cash while maintaining or cutting expenses. Your Business Cash Inflows Cash Outflows Negative cash flow (Cash Outflows > Cash Inflows )

What are the Cash Inflows and Outflows?:

What are the Cash I nflows and Outflows? Cash Inflows Cash Outflows Cash sales Payments to suppliers Receipts from trade debtors Wages and salaries Sale of fixed assets Payments for fixed assets Interest on bank balances Tax on profits Grants Interest on loans & overdrafts Loans from bank Dividends paid to shareholders Share capital invested Repayment of loans

Cash “Flows” Around a Business:

Cash “Flows” Around a Business Outflow - cash paid to suppliers & employees Inflow – cash paid by customers The Cash Flow Cycle Stocks ordered from supplier Production t urns s tocks into products Customers pay for their purchases Products s old to customers Stock held u ntil a c ustomer is found

Main Causes of Cash Flow Problems:

Main Causes of Cash F low P roblems Low profits or losses Excess production capacity Excess stock Allowing customers too much credit Overtrading – growing too fast Unexpected changes in the business Seasonal demand

2. Excess Production Capacity:

2. Excess Production Capacity Spending too much on fixed assets Made worse if short-term finance is used (e.g. bank overdraft ) Fixed assets are hard to turn back into cash in the short-term

3. Excess Stock:

3. Excess Stock Excess stocks tie up cash Increased risk that stocks become obsolete However, there needs to be enough stock to meet demand Bulk buying may mean lower purchase prices

Cash Flow Forecasting is SO Important:

Cash Flow F orecasting is SO Important The key to cash flow management is having good information A good cash flow forecast: Updated regularly Makes sensible assumptions Allows for unexpected changes

What is Credit Control?:

What is Credit C ontrol? Establishing credit limits for new customers Credit checking new and existing customers Setting realistic credit limits Monitoring the age of debts and chasing up bad debts Determine appropriate terms and conditions for credit Chasing up debtors will get payment in sooner but may upset customers

Managing Stocks :

Managing Stocks Stock refers to goods purchased and awaiting use or produced and awaiting sale Stocks take the form of raw materials, work-in-progress and finished goods Stockholding is costly and therefore it is sound business to: K eep smaller balances (just-in-time stocks) C omputerise ordering to improve efficiency I mprove stock control This will cut down the spending on stock but may leave the firm vulnerable to stock out

Sale of Assets:

Sale of Assets Selling spare or surplus assets is a way to achieve a short-term boost to cash flow Good examples: spare land, surplus equipment Note – not all businesses have spare assets

Checklist for Improving Cash Flow:

Checklist for Improving Cash Flow Possible Measures Assess Benefits Tick box Do Now Tick Box 1. Sales Related Increase sales (particularly those involving cash payments) ☐ ☐ Increase prices especially to slow payers ☐ ☐ Review the payment performances of customers with sales force ☐ ☐ Become more selective when granting credit ☐ ☐ Seek deposits or multiple stage payments ☐ ☐ Reduce the amount/time of credit given to customers ☐ ☐

Checklist for Improving Cash Flow:

Checklist for Improving Cash Flow Possible Measures Assess Benefits Tick box Do Now Tick Box 4. Credit Management Bill as soon as work has been done or order fulfilled ☐ ☐ Generate regular reports on receivable ratios and aging ☐ ☐ Establish and adhere to sound credit practices - train staff ☐ ☐ Use more pro-active collection techniques ☐ ☐ Add late payment charges or fees where possible ☐ ☐ Provide discounts for early payments ☐ ☐

Checklist for Improving Cash Flow:

Checklist for Improving Cash Flow Possible Measures Assess Benefits Tick box Do Now Tick Box 7. Financing Use factoring or discounting to accelerate receipts from sales ☐ ☐ Re-negotiate bank facilities to reduce charges ☐ ☐ Seek to extend debt repayment periods ☐ ☐ Net off or consolidate bank balances ☐ ☐ Defer dividend payments ☐ ☐ Raise additional equity ☐ ☐ Convert debt into equity ☐ ☐ Make medium- and short-term cash flow forecasts - update regularly ☐ ☐

8 Types of Waste (Manufacturing):

8 Types of Waste (Manufacturing) Overproduction Producing more than what the customer needs Inventory Building and storing extra products the customer has not ordered Transportation Moving from one place to another Defects Reprocessing, scrap or correcting work Over-processing Adding excess value when the customer does not require it Motion Extra physical/mental motion that doesn’t add value Intellect Not using employees full intellectual contribution Waiting Employees waiting for parts, machine, process or information Waste

Waste Elimination & Cash Flow:

Waste Elimination & Cash Flow Eliminating waste such as overproduction, excess inventory and defects can improve cash flow Depending on which of the eight waste are targeted for elimination, the cost savings can either be: H ard savings S oft savings A combination of hard and soft savings

Waste Elimination & Cash Flow:

Waste Elimination & Cash Flow Hard savings Savings that have a direct impact on cash flow , e.g. wages, assets and material costs Soft savings Savings which are intangible with no definite price tag attached to them, e.g. opportunity costs, productivity improvement and employee satisfaction Benefits Benefits can comprise hard and/or soft savings

Overproduction :

Overproduction It is the worst of the eight waste It is the exact opposite of just-in-time production Overproduction means making what is unnecessary, when it is unnecessary, and in unnecessary amounts Occurs when you manufacture items when there are no orders

How to Eliminate Overproduction:

How to Eliminate Overproduction Line balancing One-piece flow Pull production using kanban Quick-changeover operations L evel-production – small-lot, mixed production

Excess Inventory :

Excess Inventory Overproduction leads to inventory Inventory means any goods that are being retained for any length of time, inside or outside the factory Inventory includes raw materials, work-in-process, assembly parts and finished goods One of the best ways to begin finding waste is to look for retention points where inventory tends to pile up

How to Eliminate Excess Inventory:

How to Eliminate Excess Inventory U-shaped manufacturing cells, layout of equipment by process instead of operation Production leveling Regulating the flow of production Pull production using kanban Quick changeover operations

Budget versus Forecast:

Budget versus Forecast Economic Challenges & Business Risks The “Budget” Future State Current State The “Forecast”

Budget versus Forecast:

Budget versus Forecast Budget is a plan for where a business wants to go F orecast is the indication of where a business is actually going Forecast is a more useful tool than budget as it gives a short-term representation of the actual circumstances in which a business finds itself The information in a forecast can be used to take immediate action

Elements of a Cash Flow Forecast:

Elements of a Cash Flow F orecast The cash flow forecast identifies the sources and amounts of cash coming into your business and the destinations and amounts of cash going out over a given period There are normally two columns, listing forecast and actual amounts respectively The forecast is usually done for a year or quarter in advance and divided into weeks or months

Elements of a Cash Flow Forecast:

Elements of a Cash Flow F orecast The forecast should list: Receipts - any money that will come in during that period Payments - any money that will go out during that period Excess of receipts over payments - with negative figures shown in brackets Bank balance at the start of the period Bank balance at the end of the period

Example of Cash Flow Forecast:

Net Cash Flow = Total Inflow (A) – Total Outflow (B) Closing Balance (E ) is carried as new Opening Balance Closing Balance = Opening Balance (D) + Net Cash Flow (C) Key Formulas: Closing Balance – Add opening and net cash Sep Oct Nov Dec CASH INFLOW Cash Sales 6000 6500 8000 11000 Credit Sales 2000 3000 3500 4000 Total Inflow (A) 8000 9500 11500 15000 CASH OUTFLOW Materials 2500 3400 3600 5600 Wages 4000 4000 4000 4500 Other Overheads 1400 1500 1500 2100 Total Outflow (B) 7900 8900 9100 12200 Net Cash Flow (C) 100 600 2400 2800 Opening Balance (D) 800 900 1500 3900 Closing Balance (E) 900 1500 3900 6700 Example of Cash Flow Forecast Cash Inflow – Money coming in Cash Outflow – Money going out Closing Balance – Add opening and net cash Opening Balance (2) – Closing balance from previous month is carried over Net Cash-flow – Difference between inflows and outflows Opening Balance (1) – what is left from the previous month/ year

Creating & Analyzing a Cash Flow Forecast:

Creating & Analyzing a Cash Flow Forecast Create yearly revenue and profitability goals. Input actual data into the cash flow worksheet. Figure out your net cash flow. Are you making more than you spend? Figure out your average monthly spend. Utilize the weekly sales opportunity meetings to determine which opportunities you need to close.

About Operational Excellence Consulting:

About Operational Excellence Consulting

About Operational Excellence Consulting:

About Operational Excellence Consulting Operational Excellence Consulting is a management training and consulting firm that assists organizations in improving business performance and effectiveness. The firm’s mission is to create business value for organizations through innovative operational excellence management training and consulting solutions. OEC takes a unique “beyond the tools” approach to enable clients develop internal capabilities and cultural transformation to achieve sustainable world-class excellence and competitive advantage. For more information, please visit www.oeconsulting.com.sg

To download this presentation, please visit us at: www.oeconsulting.com.sg:

To download this presentation, please visit us at : www.oeconsulting.com.sg END OF PARTIAL PREVIEW

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