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How can I make a profit and still run out of cash?
Review Financial StatementsCash Flow and Working Capital
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Foundations Update
…and the market continues to be competitive More products More aggressive More options
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Round 0
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Round 1
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Round 2
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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
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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?
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Business Activities
Your Cash Management decisions:1. Operating: using $
create goods /services/ exchanges
2. Investing: what do you do with $ acquire assets (stuff) to run a businessrenting $ to others (who earn higher return)
3. Financing: where do you get $funds to start and grow a business (debt / equity / retained earnings)
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Operating
Run the company that you have… with Working Capital
Production
cash & accts payable ==> inventory
Sellinginventory ==> cash & accts receivable
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Where is the Working Capital?
On the Balance Sheet, Working Capital shows up as: Current Assets Current Liabilities
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operatingworking capital
operatingworking capital
Balance SheetASSETS 2008
Cash $0Accounts Receivable $5,916
Inventory $8,120Total Current Assets $14,306
Plant & Equipment $48,800Accumulated Depreciation ($11,181)Total Fixed Assets $37,619Total Assets $51,655
LIABILITIES & OWNER'S EQUITY
Accounts Payable $4,926Current Debt $11,273Long Term Debt $15,833Total Liabilities $32,032
Common Stock $4,313Retained Earnings $15,310Total Equity $19,623
$51,655Total Liabilities & Equity
4,8984,940
0$ 9,838
$28,200($7,928)$20,272$30,110
$3,901$ 867
$10,333$15,101
$2,313$12,679$15,010
$30,110
2007
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Inventory Too little inventory
sell all the sensors you make ==> STOCK OUT lost sales & opportunities ==> bad management
Too much inventory inventory is expensive- it ties up cash product “ages” and is less desirable
Just right 1 or more units left less than 60 days (production scheduled/6)
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Where is the Working Capital?
Cash has been depleted from last year. Where is it? It was eaten up by inventory – a result of poor sales
forecasting Carrying costs
Accounts payable increased Partially offsets high inventory levels
(it is like an interest free loan from vendors)
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Where is the Working Capital?
Current Debt has increased by $10,406 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.
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Working Capital and Cash Flow Business Cycle
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)
Accounts Payable
Inventory
Sales
Accounts Receivable
Cash
Less
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Business Activities
Your Cash Management decisions:1. Operating: using $ Operating: using $
create goods /services/ exchangescreate goods /services/ exchanges
2. Investing: what do you do with $ acquire assets (stuff) to run a businessrenting $ to others (who earn higher return)
3. Financing:Financing: where do you get $where do you get $funds to start and grow a business (debt / funds to start and grow a business (debt / equity / retained earnings)equity / retained earnings)
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Investing
Create company you want to run? Build a new factory? Increase capacity for a current product? Increase Automation?
All will increase Plant & Equipment, so it follows that… Any increase in the value of plant and equipment is an
increase in capacity or an investment in your company
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Capacity
If you increase your capacity, it is a long-term
investment long term or fixed asset and you
should generate the funds from – long term sources:
retained earnings issue bonds issue stock
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investing
operatingworking capital
operatingworking capital
Balance SheetASSETS 2008
Cash $0Accounts Receivable $5,916
Inventory $8,120Total Current Assets $14,306
Plant & Equipment $48,800Accumulated Depreciation ($11,181)Total Fixed Assets $37,619Total Assets $51,655
LIABILITIES & OWNER'S EQUITY
Accounts Payable $4,926Current Debt $11,273Long Term Debt $15,833Total Liabilities $32,032
Common Stock $4,313Retained Earnings $15,310Total Equity $19,623
$51,655Total Liabilities & Equity
4,8984,940
0$ 9,838
$28,200($7,928)$20,272$30,110
$3,901$ 867
$10,333$15,101
$2,313$12,679$15,010
$30,110
2007
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Business Activities
Your Cash Management decisions:1. Operating: using $ Operating: using $
create goods /services/ exchangescreate goods /services/ exchanges
2. Investing:Investing: what do you do with $what do you do with $ acquire assets (stuff) to run a businessacquire assets (stuff) to run a businessrenting $ to others (who earn higher return)renting $ to others (who earn higher return)
3. Financing: where do you get $funds to start and grow a business (debt / equity / retained earnings)
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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
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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
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financing
investing
operatingworking capital
operatingworking capital
Balance SheetASSETS 2008
Cash $0Accounts Receivable $5,916
Inventory $8,120Total Current Assets $14,306
Plant & Equipment $48,800Accumulated Depreciation ($11,181)Total Fixed Assets $37,619Total Assets $51,655
LIABILITIES & OWNER'S EQUITY
Accounts Payable $4,926Current Debt $11,273Long Term Debt $15,833Total Liabilities $32,032
Common Stock $4,313Retained Earnings $15,310Total Equity $19,623
$51,655Total Liabilities & Equity
4,8984,940
0$ 9,838
$28,200($7,928)$20,272$30,110
$3,901$ 867
$10,333$15,101
$2,313$12,679$15,010
$30,110
2007
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Balance SheetASSETS 2008
Cash $0Accounts Receivable $5,916
Inventory $8,120Total Current Assets $14,306
Plant & Equipment $48,800Accumulated Depreciation ($11,181)Total Fixed Assets $37,619Total Assets $51,655
LIABILITIES & OWNER'S EQUITY
Accounts Payable $4,926Current Debt $11,273Long Term Debt $15,833Total Liabilities $32,032
Common Stock $4,313Retained Earnings $15,310Total Equity $19,623
$51,655Total Liabilities & Equity
4,8984,940
0$ 9,838
$28,200($7,928)$20,272$30,110
$3,901$ 867
$10,333$15,101
$2,313$12,679$15,010
$30,110
2007
What changed as a result of the year’s operations?
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Balance SheetASSETS 2008
Cash $0Accounts Receivable $5,916
Inventory $8,120Total Current Assets $14,306
Plant & Equipment $48,800Accumulated Depreciation ($11,181)Total Fixed Assets $37,619Total Assets $51,655
LIABILITIES & OWNER'S EQUITY
Accounts Payable $4,926Current Debt $11,273Long Term Debt $15,833Total Liabilities $32,032
Common Stock $4,313Retained Earnings $15,310Total Equity $19,623
$51,655Total Liabilities & Equity
4,8984,940
0$ 9,838
$28,200($7,928)$20,272$30,110
$3,901$ 867
$10,333$15,101
$2,313$12,679$15,010
$30,110
2007
change as a result of the year’s decisions
($4,898)($ 976)
($ 8,120)
($20,600) 3,253
$1,025$10,406$ 5,500
$2,000$2,631
change
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Balance SheetASSETS 2006
Cash $0Accounts Receivable $5,916
Inventory $8,120Total Current Assets $14,306
Plant & Equipment $48,800Accumulated Depreciation ($11,181)Total Fixed Assets $37,619Total Assets $51,655
LIABILITIES & OWNER'S EQUITY
Accounts Payable $4,926Current Debt $11,273Long Term Debt $15,833Total Liabilities $32,032
Common Stock $4,313Retained Earnings $15,310Total Equity $19,623
$51,655Total Liabilities & Equity
4,8984,940
0$ 9,838
$28,200($7,928)$20,272$30,110
$3,901$ 867
$10,333$15,101
$2,313$12,679$15,010
$30,110
2007 change decisions
($4,898)($ 976)
($ 8,120)
($20,600) 3,253
$1,025$10,406$ 5,500
$2,000$2,631
ran out $
Unsold sensors
big invest.
e-loan
long termfinancing
profitre-invested
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Cash Flow Statement
Shows movement of cash in and out of an organization over a given period
Shows how much cash is available for use during a given period
Reconciles net profit back to cash operating activities investing activities financing activities
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Cash Flows from Operating ActivitiesNet Income (Loss) $2,631Adjustment for non-cash items
Depreciation $3,253
Change in Current Assets and LiabilitiesAccounts Payable $1,025Inventory ($8,120)Accounts Receivable ($976)
Net cash from operations
Cash Flows From Investing ActivitiesPlant Improvements ($20,600)
Cash Flows from Financing ActivitiesDividends PaidSales of Common Stock $2,000Purchase of Common StockCash from long term debt $5,500Retirement of long term debtChange in current debt (net) $10,406
Net cash from financing activities
Net change in cash position ($4,898)Closing cash position $0
How canyou makeaprofit
and still take ane-loan
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Cash Flows from Operating ActivitiesNet Income (Loss) $2,631Adjustment for non-cash items
Depreciation $3,253
Change in Current Assets and LiabilitiesAccounts Payable $1,025Inventory ($8,120)Accounts Receivable ($976)
Net cash from operations
Cash Flows From Investing ActivitiesPlant Improvements ($20,600)
Cash Flows from Financing ActivitiesDividends PaidSales of Common Stock $2,000Purchase of Common StockCash from long term debt $5,500Retirement of long term debtChange in current debt (net) $10,406
Net cash from financing activities
Net change in cash position ($4,898)Closing cash position $0
profit
Issue bonds
increasedcapacity
Issue stock
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Cash Flows from Operating ActivitiesNet Income (Loss) $2,631Adjustment for non-cash items
Depreciation $3,253
Change in Current Assets and LiabilitiesAccounts Payable $1,025Inventory ($8,120)Accounts Receivable ($976)
Net cash from operations
Cash Flows From Investing ActivitiesPlant Improvements ($20,600)
Cash Flows from Financing ActivitiesDividends PaidSales of Common Stock $2,000Purchase of Common StockCash from long term debt $5,500Retirement of long term debtChange in current debt (net) $10,406
Net cash from financing activities
Net change in cash position ($4,898)Closing cash position $0
Change inInventory
At a unit cost=$24, this is 338 units
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Cash Flows from Operating ActivitiesNet Income (Loss) $2,631Adjustment for non-cash items
Depreciation $3,253
Change in Current Assets and LiabilitiesAccounts Payable $1,025Inventory ($8,120)Accounts Receivable ($976)
Net cash from operations
Cash Flows From Investing ActivitiesPlant Improvements ($20,600)
Cash Flows from Financing ActivitiesDividends PaidSales of Common Stock $2,000Purchase of Common StockCash from long term debt $5,500Retirement of long term debtChange in current debt (net) $10,406
Net cash from financing activities
Net change in cash position ($4,898)Closing cash position $0
Even with a profit …
too muchinventoryand a hugeinvestmentwith…
too little long termfinancing
and you haveto take ane-loan