Working Capital and Cash Flow Management Workshop by Dr. Paul Newsom

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Join Dr. Paul Newsom at the SCORE workshop hosted by Aiken Chamber of Commerce to gain insights into working capital and cash flow management. Learn about key ratios, cash conversion periods, and important working capital metrics for better financial management. Explore the significance and impact of working capital in business operations.

  • Working Capital
  • Cash Flow
  • Workshop
  • Dr. Paul Newsom
  • Financial Management

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  1. SCORE Workshop: Aiken Chamber of Commerce Aiken, SC USA June 23, 2017 Dr. Paul Newsom CFA University of South Carolina Aiken |CSR Angels Associate Professor of Finance | Managing Director

  2. Welcome to the SCORE workshop on Working Capital & Cash Flow! This workshop will evaluate and analyze working capital and measures of cash flow. Paul Newsom, Ph.D, CFA., SCORE Counselor 2

  3. Working Capital What is it? Why is it important? Who cares? Paul Newsom, Ph.D, CFA., SCORE Counselor 3

  4. Working Capital Paul Newsom, Ph.D, CFA., SCORE Counselor 4

  5. Ratios Reflecting Working Capital 1. Inventory conversion period: ????????? ???? ?? ????? ???? 365 ICP = 2. Receivables collection period: ??????????? ?????? ????? 365 ??? = 3. Payables deferral period: ???????? ???? ??????? ???? 365 ??? = Paul Newsom, Ph.D, CFA., SCORE Counselor 5

  6. Cash Conversion Period c?? ?????????? ?????? ??? = ????????? ?????????? ?????? ??? + ??????????? ?????????? ?????? ??? ???????? ???????? ?????? (???) Paul Newsom, Ph.D, CFA., SCORE Counselor 6

  7. CCC Timeline Collect cash from sale of product or service Purchase materials or inventory Sale of product or service Pay cash for materials or inventory Payables deferral period = 30 days Inventory conversion period = 45 days Receivables collection period = 30 days Cash conversion cycle (CCC) = 45 + 30 30 = 45 days Day 1 Day 30 Day 75 Day 45 Paul Newsom, Ph.D, CFA., SCORE Counselor 7

  8. Cash Conversion Period Paul Newsom, Ph.D, CFA., SCORE Counselor 8

  9. Important Working Capital Ratios 4. Net working capital: NWC = CA CL 5. Current ratio: ??????? ?????? (??) ??????? ??????????? (??) ?? = 6. Quick ratio: ?? ????????? ?? ?? = Paul Newsom, Ph.D, CFA., SCORE Counselor 9

  10. Practice Time! Use your own financials to compute ratios and cash conversion cycle. OR Use financials statements provided. Application: What does the ratio say? What does the ratio mean? How can you use this ratio to help you make better decisions? Paul Newsom, Ph.D, CFA., SCORE Counselor 10

  11. Paul Newsom, Ph.D, CFA., SCORE Counselor 11

  12. Paul Newsom, Ph.D, CFA., SCORE Counselor 12

  13. Cash Flow Process Paul Newsom, Ph.D, CFA., SCORE Counselor 13

  14. Operating Cash Flow (OCF) ??? = ???? ????? + ???????????? Income Statement Sales - Variable operating expenses (cogs) = Gross profit - Fixed operating expenses (S,G, & A) = EBITDA - Depreciation & amortization = EBIT - Interest expense = EBT - Tax = Net income (profit) Measures the cash produced by operating your business before making any investment in working capital or fixed capital (property, plant, and equipment) necessary to grow the business or keep the business a going concern. Noncash expense!! It s the cash flow that debt investors and equity investors have claim to. Paul Newsom, Ph.D, CFA., SCORE Counselor 14

  15. Net Cash Flow (NCF) Measures the cash produced by operating your business before making any investment in working capital or fixed capital (property, plant, and equipment) necessary to grow the business or keep the business a going concern. ??? = ??? ?????? + ???????????? Income Statement Sales - Variable operating expenses (cogs) = Gross profit - Fixed operating expenses (S,G, & A) = EBITDA - Depreciation & amortization = EBIT - Interest expense = EBT - Tax = Net income (profit) It s the cash flow that equity investors (business owners) have claim to. Paul Newsom, Ph.D, CFA., SCORE Counselor 15

  16. Free Cash Flow to Equity (FCFE) Free Cash Flow to Firm (FCFF) ???? = ?? + ???????????? ????? ????? + ??? ????????? ???? = ???? ????? + ???????????? ????? ????? Measures the cash produced by operating your business after making all investments in working capital or fixed capital (property, plant, and equipment) necessary to grow the business or keep the business a going concern. Measures the cash produced by operating your business after making all investments in working capital or fixed capital (property, plant, and equipment) necessary to grow the business or keep the business a going concern. It s the cash flow that equity (business owners) and debt investors are FREE to distribute to themselves. It s the cash flow that equity investors (business owners) are FREE to distribute to themselves. Paul Newsom, Ph.D, CFA., SCORE Counselor 16

  17. Free Cash Flow Firm (FCFF) Paul Newsom, Ph.D, CFA., SCORE Counselor 17

  18. Practice Time! Use your own financials to compute ratios and cash conversion cycle. WCInv = NWCyr=t NWCyr=t-1 FCInv = netFixedAssetsyr=t netFixedAssetsyr=t-1 + Depreciation Expense ???? = ?? + ???????????? ????? ????? + ??? ????????? OR Use financials statements provided. Paul Newsom, Ph.D, CFA., SCORE Counselor 18

  19. Cash Budgeting (short-term financial planning) A process used to plan for storage of excess cash or financing of cash shortfalls (not enough cash). It records estimates of cash receipts and cash disbursements Daily, weekly, monthly, quarterly Starting point: Forecasting Sales (i.e., sales budget) Many important items on the income statement and on the balance sheet are related to sales. Paul Newsom, Ph.D, CFA., SCORE Counselor 19

  20. Example: Cash Budget All of Fun Toys' cash inflows come fom the sale of toys. Cash budgeting for Fun Toys starts with a sales forecast for the upcoming year by quarter. Fun Toys' fiscal year starts on July 1. Fun Toys's sales are seasonal and are usually very high in the second quarter (October - December) due to holiday sales. Fun Toys sells to department stores and the like on account, so no cash is generated at the time of sale. Instead, cash comes later from collection of accounts receivable. Fun Toys has a 90-day collection period, and 100% of sales are collected the following quarter. In other words, Collections = Last quarter's sales* % of sales collected. This relationship implies that: Accounts receivables at end of last quarter = Last quarter's sales % of Sales collected Receivables collection period (in qrts) 100.00% 1.00 Paul Newsom, Ph.D, CFA., SCORE Counselor 20

  21. Cash Collections CASH COLLECTIONS (in millions) Sales starting receivable Cash Collections Ending receivables Historical Projected Projected Projected Projected Q1 Q2 100 200 100 100 100 100 100 200 Q4 Q3 Q4 Q1 100 150 200 200 150 100 150 150 100 100 100 Paul Newsom, Ph.D, CFA., SCORE Counselor 21

  22. Cash Disbursements Purchases are made on account one quarter in advance of sales. Purchases are 50% of next quarter's sales and are paid off 1 quarter after the purchase. Wages, taxes, and other variable expenses are 20% of sales. These expenses are paid in the same quarter as incurred. Fixed operating expenses such as lease payments and insurance are 10 million per quarter. Finally, Fun Toys expects a 100 million capital expenditure in the fourth quarter and is forecasting 10 million of cash disbursements associated with financing activities such as interest expense and dividends. Paul Newsom, Ph.D, CFA., SCORE Counselor 22

  23. Cash Disbursements Purchases (% of next quarter's sales) 50.00% Wages, taxes, and other (% of current quarter's sales) 20.00% Long-term financing expenses: interest expense & cash dividends Fixed operating expenses (in millions) $10.00 $10.00 CASH DISBURSEMENTS (in millions) Sales Purchases Uses of cash: Payment of purchases Wages, taxes, and other variable expenses Fixed operating expenses Capital expenditures Financing expenses: interest & dividends Total uses of cash Historical Projected Projected Projected Projected Q1 Q2 100 200 100 75 Q4 Q3 Q4 Q1 100 50 150 50 100 50 100 50 20 10 0 10 90 100 40 10 75 30 10 0 10 125 50 20 10 100 10 190 0 10 160 Paul Newsom, Ph.D, CFA., SCORE Counselor 23

  24. Cash Budget CASH BALANCE (in millions) Sources of cash: Cash collection on sales Uses of cash: Total uses of cash Net change in cash Cumulative excess cash balance Minimum cash balance Cumulative finance surplus (deficit) requirement Historical Projected Projected Projected Projected Q1 Q2 Q4 Q3 Q4 Q1 100 100 200 150 90 10 10 5 5 160 -60 -50 125 75 25 190 -40 -15 0 5 5 5 (55) 20 (20) Paul Newsom, Ph.D, CFA., SCORE Counselor 24

  25. Thank You for attending the SCORE Workshop on Working Capital and Cash Flow! June 23, 2017 Dr. Paul Newsom CFA University of South Carolina Aiken |CSR Angels Associate Professor of Finance | Managing Director

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