Barrow Boy's Guide to Cashflow

Barrow Boy’s Guide to Cashflow Business Finance Training

Barrow Boy’s Guide to Cashflow Business Finance Training Bazzer’s

Business Finance Training The recession has pushed many businesses in to bankruptcy, including some famous high street names. But come boom or bust, businesses like Bazzer’s fruit and veg stall always do well. How do they do it?

[object Object],[object Object],[object Object],[object Object],[object Object],It’s far too important to leave to my accountant

[object Object],[object Object],[object Object],[object Object],[object Object],Lose control of cashflow and you’ve lost control of your business

Loans Owners funds Cash What is working capital? External Internal Funds come in to the business as cash - from the business owner, from share capital and loans

Loans Owners funds Cash What is working capital? External Internal Stock Cash is converted in to stock

Loans Owners funds Cash What is working capital? External Internal Stock Debtors When stock is sold and invoiced it is converted in to what accountants call debtors. But it is better to think of it as a ‘free loan’ to the customer

Loans Owners funds Stock Cash Debtors = Trade Cycle What is working capital? External Internal When customers pay their invoices debtors are converted back to cash This is called the Trade Cycle

Loans Owners funds Stock Cash Debtors Creditors External Internal What is working capital? If suppliers give credit terms this is effectively a free loan to the business - and an additional source of funds, referred to as creditors

Loans Owners funds Stock Cash Debtors Creditors External Internal What is working capital? When the supplier invoice is paid the funds flow back to the creditor.

Loans Owners funds Stock Cash Debtors Creditors = Working capital External Internal What is working capital? Working capital is the circulating capital inside your business Cash, stock, debtors and creditors together make up working capital

[object Object],Annual sales £4,800,000 Cost of sales £3,600,000 How much working capital does a business need? Let’s have a look Frank’s Fashions – my mate’s business that imports women’s clothes and sells them wholesale

[object Object],Annual sales £4,800,000 Cost of sales £3,600,000 Stock (inventory) £ 600,000 Working capital: Frank normally holds enough stock to cover two months’ sales – this means he can offer a good choice and supply quickly The average cost of two months’ sales is 2 x £3,600,000 = £600,000 12

[object Object],Annual sales £4,800,000 Cost of sales £3,600,000 Stock £ 600,000 Working capital: It usually takes 40 days for Frank’s customers to settle their invoices – that’s not bad for the wholesale trade The value of 40 days uncollected sales is 40 x £4,800,000 = £530,000 365 Debtors £ 530,000

[object Object],Annual sales £4,800,000 Cost of sales £3,600,000 Stock £ 600,000 Working capital: Most of Frank’s suppliers give him one month’s credit The value of 30 days credit on stock purchases is 1 x £3,600,000 = £300,000 12 Debtors £ 530,000 Creditors £( 300,000)

[object Object],Annual sales £4,800,000 Cost of sales £3,600,000 Stock £ 830,000 £ 600,000 £( 300,000) Working capital: Debtors Creditors £ 530,000 Which means Frank needs £830,000 to fund his working capital WORKING CAPITAL

Stock Cash Debtors Creditors = Working capital External Internal The working capital cycle Now let’s work out how long it takes to complete this circulating process which the accountants call the ‘working capital cycle’

[object Object],Annual sales £4,800,000 Cost of sales £3,600,000 Stock £ 830,000 £ 600,000 £( 300,000) Working capital: Debtors Creditors WORKING CAPITAL = 60 days to sell the stock £ 530,000 = 40 days to collect the ‘free loans’ = (30) days to pay suppliers = 70 days working capital cycle Frank’s business takes 70 days to complete the working capital cycle

Business Finance Training It’s important that when you make any business decisions you take in to account the likely impact on working capital and cashflow – lot’s of businesses don’t. Frank decided he could save a few quid by importing some of his women’s clothes from China. He got the cost of the clothes down a bit but the problem was it took longer to get here. Frank had to increase the amount of stock he held to cover the longer delivery time. In fact he had to hold an extra one months’ worth of stock - and he hadn’t checked how much this was going to cost him!

[object Object],Annual sales £4,800,000 Cost of sales £3,600,000 Stock £ 830,000 £ 600,000 £( 300,000) Working capital: Debtors Creditors WORKING CAPITAL £ 530,000 The extra delivery time means Frank must increase his stock by 50% = 60 days to sell the stock

[object Object],Annual sales £4,800,000 Cost of sales £3,600,000 Stock £ 1,130,000 £ 900,000 £( 300,000) Working capital: Debtors Creditors WORKING CAPITAL £ 530,000 So Frank has to find an extra £300k to fund the additional stock! + £300,000 + £300,000

[object Object],Annual sales £4,800,000 Cost of sales £3,600,000 Stock £ 1,130,000 £ 900,000 £( 300,000) Working capital: Debtors Creditors WORKING CAPITAL £ 530,000 = 90 days to sell the stock = 40 days to collect the ‘free loans’ = (30) days to pay suppliers = 100 days working capital cycle The business takes 30 days longer to complete the working capital cycle

Business Finance Training Frank didn’t have all of the £300,000 he needed for the extra stock so he borrowed some from his brother. If he hadn’t been able to get hold of the £300,000 he would have been in trouble one way and another. Frank was lucky, lots of other businesses get caught out by ignoring working capital. Some pay the ultimate price and go bust!

[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Think cashflow! How do decisions affect working capital and cashflow?

Look out for my Barrow Boy’s Guide to Profit Business Finance Training

Business Finance Training the cost effective way to improve business results Paul Lower FCMA

Barrow Boy's Guide to Cashflow

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