Dr Liam Bastick (Director of Corality, Melbourne) discusses cash flow management, cash flow forecasts, and the main problems associated with cash flows in different business structures.

1. Business Operations
Corality
Cash Flow Management
for Critical Decision Making

2. Setting the scene
 ASX fell 43% in 2008 – largest ever drop
 Consumer confidence remains dented:
 borrowing less
 spending less
 Economic growth is still slow
 Recent ACCI Business Expectations Surveys suggest
indicators of sales revenue and profit levels were at their
lowest levels ever, with three in seven companies
expecting profits to fall
But are we focusing on the key issue..?

3. The importance of cash flow
 Whether you are a manufacturer, retailer, distributor or service
provider, it is important to know and understand the internal and
external factors that can impact cash flow
 The major goal of a business is not to make a profit, but to receive
the underlying cash – the process is not complete until then
 Common factors that affect cash flow
 Raw materials: Supply delays, sudden price increases and defective
material
 Suppliers: with cash flow problems, tighter credit terms
 Outsourcing to unsuitable firms
 Within the business: defective goods, poor infrastructure, unplanned
inventory, design problems, delayed deliveries, low sales, selling on
credit, labour problems, fraud, obsolete technology, bad financial and
staffing decisions, slow moving inventory, employee shortages, lack of
expertise and equipment for a specialised job, wrong pricing
 External: competition, economic fluctuations, changes in law

4. Business structure
Consider this in four parts:
 Physical
 Operational
 Responsibility
 Financial

5. Physical structure
Simpler structures tend to consume less cash
 More responsive and adaptable, less bureaucracy
 Lower fixed costs, “lean and mean”
 However, do need to consider rapid expansion issues

6. Operational structure
 Importance of profit margins
 Nature of costs:
 Direct versus indirect
 Variable versus fixed
 Operational Leverage formula:
Fixed Costs
Total Costs
 Understand drivers of the working capital cycle…

7. Responsibility structure
 Culture of responsibility is important
 Staff remuneration / bonuses can drive productivity and efficiencies
– if employed correctly
 Motivation factors may differ for different types of business unit:
 Revenue centres
 Cost centres
 Profit centres
 Investment centres
 Need to consider the business linkages,
e.g. Cash Generating Units

8. Cash flow management
 The process of monitoring, analysing and adjusting business cash
flows
 Why is it important?
 Not enough to just focus on increasing sales and improving profit
margins
 Must develop cash management policy to ensure cash flow follows the
increases in sales
 Techniques
 Financial projections
 Develop budgets
 Cost reduction strategy
 Maintain low salaries and other controllable costs
 Track accounts receivable, expenses, credit lines

9. Techniques
Proactive
 Cash discount / price incentive schemes
 Inventory management, e.g. Just In Time
 Optimising assets‟ economic lives
 Lease vs. buy
 Reducing controllable costs (budget cuts)
 Refinancing / amending capital structure
Reactive
 Accounts Payable teams
 Credit collection agencies vs. debt factoring
 Supplier negotiations
 Vertical integration / partnerships

10. Cash flow forecasts
 Cash flow forecasts are vital for
 Actively managing the cash to ensure survival
 Obtaining proper advice as to whether to continue to trade
 Obtaining and maintaining bank support
 Helps keep control of the cash you have – ensures cash
is used efficiently
 Can verify key drivers of cash inflows and outflows
 Provides informative variance analysis
 Should be updated regularly and may have small
periodicity

11. Modelling forecasts
 Sometimes companies don‟t realise they are running out of cash
 Need models, not just quarterly or monthly, but also weekly
 Working Capital Management Model
 Make critical decisions quickly
 Ongoing view
 What are the effects of COGS, payment timing?
 Help you identify sustainable level of growth
 Keep a close eye on cash flow, to forecast potential cash flow problems
and take steps to remedy them
 Early detection
 Ongoing monitoring
 „What if‟ analysis
 Answer questions
 Are we you spending more cash now than what we‟ll receive in the
following month?
 Which customers are slow payers?

12. Working capital cycle
Cash receipts Purchase
orders
Raw materials
Debtors / inventory
receivables
Work In Progress
inventory
Distribution /
transit / retail
stocking (sale
or return?)
Other production
Finished goods resources
inventory

13. Main cash flow problems
1. Failing to plan for market volatility and changing
conditions
2. Tying up capital in stock and equipment
3. Buying long-term assets out of current cash flow
4. Collecting accounts receivable too slowly
5. Failing to put excess cash to work
6. Overtrading

14. Thank you!
Sydney
Michael Michaelides
+61 2 9222 9222
sales@corality.com
Melbourne
Liam Bastick
+61 3 8610 6301
contact@corality.com