Part I Cash flow management

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1 Bank of America Merrill Lynch White Paper Part I Cash flow management May 2013 Setting your business up for success Executive summary Cash flow is a term broadly used to define any movement past or projected of cash in or out of a business. It is vital to the success of any enterprise. If you master the intricacies of cash flow management and financial planning, you can increase your chances of achieving, and even surpassing, your goals. Careful planning will empower. No longer will you find yourself hoping everything will just balance itself out in the end. Embrace cash flow management today. It will positively impact your business and help Contents Receivables inflow... 2 Payables cash outflow... 2 Cash flow misconceptions... 2 Cash flow management... 5 Cash flow projections... 5 Summary... 6 you sleep better at night, too. To develop the skills needed to properly manage your cash flow, it is important to understand the basics. For example, what exactly is cash flow? Cash flow can be broken into two primary categories: Inflow vs. outflow. Simply put, inflow is getting paid or receivables. Outflow is spending money or payables.

2 Part I CASH FLOW MANAGEMENT 2 Receivables inflow Inflow covers all the ways your business brings in cash or gets paid. For example, cash sales, collection of payments due and return on investment make up cash inflow. It is extremely rare that a small business is resting on substantial cash reserves; therefore, focusing on how to constantly bring more cash in the door should be a top priority for any small business owner. There are ways to help increase cash flow by leveraging financial services products so you are paid more quickly and more frequently. We ll dive more deeply into that in part two of the Informational Guides. Payables cash outflow Outflow covers all the ways your business spends cash. This includes everything from buying inventory and office equipment to paying employees and taxes. When you consider all the ways cash can leave your business, it seems daunting to try to keep your costs down. But there are a number of ways you can moderate and space out the timing of your expenses, which will also be addressed in part two of the Informational Guides. The important thing to keep in mind is that, for your business to be successful, cash in must always exceed cash out. Negative cash flow is easily the biggest pitfall for any small business. Cash flow misconceptions As with many business concepts, cash flow is riddled with misconceptions. Many business owners confuse cash flow with profit and loss or earnings. Cash flow should come from profit or earnings, but this can only happen if you manage your cash flow wisely and understand the difference between cash flow and profit and loss. Cash flow, as previously discussed, is the movement of funds in and out of your business, whereas profit or earnings is the excess of income over expenses or, in the case of loss, expenses over income. I used to only concern myself with the creative side of my business. I thought, as long as I was producing something beautiful and unique, the business would come and all balance out. Then I hired a financial manager, and he insists we balance our books every month. He was the first person to point out how important cash flow is. If it wasn t for his close eye on my cash every month, I don t know that I d still be here. Head Chef and Small Restaurant Owner, Denver, CO A common cash flow misconception is that forecasting is a waste of time. Many even claim it is impossible. Business owners often argue that there are simply too many variables with regard to the economy, unexpected expenses, etc. There are variables, but research into the history of your cash flow over time can open your eyes to when you should be a little tighter with the purse strings, when you are most likely to be up and in a good position to spend, and when you may need to reduce expenses or borrow if necessary. Cash flow forecasting is absolutely possible and of the utmost importance when it comes to managing your business.

3 Part I CASH FLOW MANAGEMENT 3 While the Income Statement for August shows a profit of $7,506, the company ended the month in a negative cash position of -$3,050. Company XYZ August income statement Sales revenue $50,000 Cost of sales materials $5,000 Direct labor $3,600 $8,600 Gross margin $41,400 83% 1. Overhead Salary & employment costs $21,094 Property rent, insurance, taxes $4,700 Marketing $5,000 Office and admin $1,900 Other expenses $0 Total overhead $32,694 EBITDA Earnings Before Interest, Tax, Depreciation and Amortization $8,706 Depreciation $0 Interest $1,200 Profit before tax $7,506 15% August revenue includes total sales for that month, but not necessarily the actual cash that was received. 2. August shows a profit of $7,506.

4 Part I CASH FLOW MANAGEMENT 4 The company ended August in a negative cash position despite showing a profit. Company XYZ Cash Flow Planning Forecast JUL AUG SEP actual Actual Forecast Cash on hand $6,538 $-5,556 $3, Cash receipts 2. Cash sales $15,000 $30,000 $30,000 Collections $15,000 $15,000 $20,000 Total cash receipts $30,000 $45,000 $50,000 Total cash available (before cash out) $36,558 $39,444 $46,950 Cash paid out Purchases $8,000 $5,000 $6,000 Gross wages (exact withdrawal) $16,875 $16,875 $16,875 Outside services $4,219 $4,219 $4,219 Supplies (office & oper.) $3,500 $3,600 $4,000 Repairs & maintenance $400 $400 $400 Marketing $200 $ $200 Rent $2,000 $5,000 $5,000 Telephone $4,000 $4,000 $4,000 Utilities $500 $500 $500 Insurance $500 $500 $500 Taxes (real estate, etc.) $200 $200 $200 Interest $1,200 $1,200 $1,200 Other expenses $3,500 Total cash paid out $42,094 $42,494 $47, Cash position (end of month) $-5,556 $-3,050 $ They entered August in a negative cash position due to low sales and collections in July. 2. While cash sales increased in August, collections were still low. This, together with higher marketing costs to gear up for the holidays, added to the negative cash situation. 3. When September rolls around, the copier breaks and they squeak by with just enough.

5 Part I CASH FLOW MANAGEMENT 5 Cash flow management Budgeting is one of those rituals each and every one of us as individuals must institute if we want to stay financially afloat. Unsurprisingly, the same goes for businesses. Budgeting in business is referred to as cash flow management, which seems like common sense, yet remains one of the biggest challenges for so many businesses. Cash flow is often considered the bloodline of a business; and to measure the health of any business, one must monitor how the current cash balance compares to the short-term cash demands. If you are a small business owner, remaining aware of your cash position at all times is your most accurate reality check on the true health of your venture. Begin by tracking your current cash flow. This can be done on your own, but it may be helpful to recruit the help of an accountant. It is a timely process, especially the first time around, but it will ultimately make managing your business much easier. Here are some basic steps to follow: 1. Log the date and source of all cash inflows. What brings cash in? How often does this cash come in? 2. Log the date and source of all cash outflows. What are you spending? How often are you spending? 3. Note any patterns in both inflow and outflow. Pay close attention to possible seasonal trends or look for other contributing factors that might be affecting one or the other. 4. Set up a reporting system to track cash flow moving forward and to keep your statement up to date. Keep in mind, a cash flow statement and forecast is only beneficial to those who use it. Cash flow projections Cash flow projections are all about cash on hand. Knowing, on a daily basis, how much cash you have on hand can prevent unpleasant surprises. You can keep track of cash on hand using a cash flow forecast to predict monthly expenditures. You can also project what your needs will be and how they measure up against what you have. From there you can determine what you ll need to bring in so you don t spend what you don t have. It is wise to make projections on a monthly basis, but it is also very important to forecast your cash flow six months to a year out. I m working with a chef whose objective is to create. I m the one with an MBA and a 75-page business plan. I crunch the numbers, and I have to constantly remind the other girls that just because it looks like we re making lots of money doesn t mean we ve got money to spend yet. Until I know we ve got money to immediately replace what we spend, we don t touch that cash. Pie Shop Co-Owner Madison, WI

6 Part I CASH FLOW MANAGEMENT 6 Summary One of the chief characteristics of small business owners and entrepreneurs across the board is that they tend to be problem solvers. And problem solving in business is leaps and bounds more effective if you have a good grasp on cash flow. You need to understand how cash flow is impacting the life of your business and be able to forecast what you can expect in the months to come. Stay tuned for part two of our Informational Guide series The Ins and Outs of Cash Flow. Businesses only doing cash flow planning once a year have a 36% survival rate over five years. This contrasts with those planning monthly, which have an 80% survival rate. Source: Dun & Bradstreet s Business Failures and Start-ups Analysis Bank of America Merrill Lynch is the marketing name for the global banking and global markets businesses of Bank of America Corporation. Lending, derivatives, and other commercial banking activities are performed globally by banking affiliates of Bank of America Corporation, including Bank of America, N.A., member FDIC. Securities, strategic advisory, and other investment banking activities are performed globally by investment banking affiliates of Bank of America Corporation ( Investment Banking Affiliates ), including, in the United States, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., both of which are registered broker-dealers and members of FINRA and SIPC, and, in other jurisdictions, by locally registered entities. Investment products offered by Investment Banking Affiliates: Are Not FDIC Insured May Lose Value Are Not Bank Guaranteed Bank of America Corporation AR8552B

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