Financial Concepts for Business Owners and Managers

Excess Cash

1. From operations
   1. Generating positive cash flow on monthly basis
2. From reserves
   1. Cash balances higher than needed to run the company in the short term

 

Goal

1. Keep sufficient cash balances for short term (shock absorber)
   1. Set cash balance target
   2. Set Liquidity target
2. Keep sufficient equity for long term (shock absorber)

 

What can excess cash be used for?

1. Prepay Debt
2. Add to short term cash reserves
3. Replace guaranty from Boo
4. Distributions for Tax payments
5. Distributions for Shareholders
6. Increase Inventory (if any)
   1. Advance Purchase for volume discounts, special buys or closeouts
   2. Avoid upcoming Commodity Prices increases
7. Increase Production
   1. Increased Hours
   2. Increased Equipment
   3. Increased Building
   4. Increase Storage
8. Increase Manpower (to overcome Constraints)
   1. Production
   2. Sales
9. Pay vendors faster
   1. Strengthen Relationships
   2. Use more Discounts
      1. Volume
      2. Bulk Freight
      3. Early Pay
10. Offer slower Customer terms
    1. Expand or strengthen relationship
    2. Improve other terms (price?)

 

Definitions

1. Opportunity Cost
2. Liquidity
3. Excess Cash
4. Functional Organizational Chart
   1. Vs. People Organizational Chart
5. Subordination of Debt
6. EBITDA
7. Debt Service
8. Mark up vs. Margin Pricing
9. Metrics
10. Swap
    1. Fixed Rate
    2. Variable Rate
11. Depreciation
12. Amortization for Loans
13. Amortization for Intangible Assets
14. CPA prepared Financial Statements
    1. Audited
    2. Reviewed
    3. Compiled
    4. Tax Return
15. Industrial Revenue Bond
16. Debt Covenants
17. Debt Service Ratio
    1. 1.25:1
18. Debt to Net Worth Ratio
19. Working Capital
20. Assets
21. Liabilities
22. Capital
    1. Equity
    2. Net Worth
23. Credits and Debits
    1. Changes in Credits and Debits
24. Revolving Loan
25. Term Loan
26. Factoring
27. Lien Waivers

 

Concepts

1. Liquidity
2. Short term shock absorbers
3. Long term shock absorbers
4. Line of Credit and short term borrowing
5. Swap of Interest Rates
6. Opportunity Cost
7. Incremental Profit – Contribution Margin
8. Breakeven Analysis
9. Overhead Factor
10. Cash Management
11. Inventory Turnover
12. Asset Efficiency
13. Days on Hand/Turnover
    1. Accounts Receivable
    2. Accounts Payable
14. Debt Overhead
15. Leverage
16. Cycle (or Path) to Cash
17. Financial Road Map
18. Business Risk Profile
19. Theory of Constraints
20. Functionally organized company