Financial Concepts

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