The Finance Gem 💎 Week #58: The Cash Intelligence Issue

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BEFORE WE GET STARTED

• This week I was proud to be ranked #3 in the Top 10 Linkedin Female Canada. Read my full post here.

  

• Also this week I asked our community: “How has remote work impacted their company’s operations?”. Here’s what your peers voted:

• In case you missed it and want to improve your cash flow knowledge, we had over 1,000 people join us live for the Export Development Canada’ s Payment Terms Webinar . We discussed cash flow management strategies for growing internationally and the recording is available on EDC’s portal.

• I’d love to get your thoughts on this week’s polls. Scroll below to share what you think!

LET’S GET INTO THIS WEEK’S STRATEGIC FINANCE INSIGHTS

1. Learn to Manage Cash

2. Revenue to Cash Waterfall

3. The Cash Flow Cheat Sheet

4. 20 EBITDA Adjustments

1. Learn to Manage Cash

Here's why:

To seize growth opportunities

To protect against critical business risks

To avoid financial distress and loss of business value

To maximize shareholder value and return on investment.

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🎯 Cash comes into a business from 3 main sources:

> Operations

> Investments

> Financing

🎯 Cash 1.0 is optimizing AR, AP and Inventory terms and turnover

🎯 Cash 2.0 is working on:

> Cash Flow Forecasting Techniques

> Effective Debt Management

> Capital Expenditure (CapEx) Cash Flow Optimization

🎯 Here are 4 critical reasons to remember for managing cash:

1️⃣ Seize Growth Opportunities:

⚫ you need agility to capitalize on acquisitions, expansions, or innovation

⚫ cash reserves may not be sufficient, so having a strategy to attract the incremental cash you need will allow you to take quick action on opportunities and give you a competitive edge.

2️⃣ Protect Against Critical Business Risks:

⚫ cash acts as a financial buffer against economic downturns, demand fluctuations, or supply chain issues

⚫ taking steps to ensure sufficient excess cash will help ensure your operational stability and strategic focus during unforeseen challenges

3️⃣ Avoid Financial Distress and Loss of Business Value:

⚫ effective cash management will prevent cash flow shortfalls, which are a leading cause of business failure.

⚫ the worst time to get other people's money (bank, investors) is when you actually need it

⚫ planning ahead will help you meet short-term liabilities (payroll, suppliers, debts) and avoid eroding business value and reputation.

4️⃣ Maximize Shareholder Value and Return on Investment:

⚫ strategic investments and operational decisions that drive long-term growth and profitability require advanced cash flow planning

⚫ managing cash effectively will always position companies favorable to generate and provide superior returns to shareholders

Get a free PDF copy of this sheet here.

2. Revenue to Cash Waterfall

You can’t manage what you don’t measure.

And you can’t measure what you don’t understand.

The Revenue to Cash waterfall will help you visualize,

So you can understand, measure, and manage your performance.

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🎯 The Revenue to Cash waterfall chart is a strategic tool that breaks down the story of your organization’s liquidity from opening to closing balance.

✓ It helps you connect the Income Statement and Balance Sheet with the Cash Flow Statement.

✓ Each step can reveal efficiencies or red flags that may impact financial health.

🎯 Here’s how to put it together:

➡️ Opening Cash Balance: start with the initial cash available to the business.

➡️ Revenue: add total revenue from goods sold or services provided as the influx that triggers the waterfall.

➡️ Cost of Goods Sold (COGS): subtract the direct costs attributable to the production of the goods sold by the company.

➡️ Depreciation and Amortization: subtract this non-cash expense that reflects the consumption of assets over time. We’ll add it back later.

➡️ Operating Expenses: These are the costs necessary to maintain the business's operational capabilities, excluding COGS.

➡️ Interest Expense: subtract the cost of borrowing to show the cash impact of servicing debt.

➡️ Tax Expense: subtract the cash paid for taxes which is an outflow that must be managed effectively especially as taxable income grows

➡️ Net Income: arrive at the net income for the period, which is also the starting point for making critical adjustments that will link it to the closing cash balance for the period

➡️ Depreciation and Amortization (Adjustment): add back non-cash expenses previously subtracted

➡️ Changes in Working Capital:

→ subtract the cash still not collected from sales revenues

→ subtract cash paid for new purchases but not yet sold and sitting in inventory

→ add the cash not yet paid to suppliers and other third parties.

➡️ Investments: subtract investments for long-term assets

➡️ Net Payments for Debt and Equity: subtract net cash outflows for new debt or equity

➡️ Closing Cash Balance: calculate the ending point of the waterfall, representing the final cash position for the period

Which step did you find most challenging?

🎯 This is a snapshot from my 5*, on-demand video course The Cash Flow Masterclass. Visit my website to enroll for lifetime access or watch a free webinar to learn more strategic cash flow insights.

3. The Cash Flow Cheat Sheet

The Cash Flow Cheat Sheet is essential.

Because Cash is not King 👇

Cash Flow is.

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Cash Flow intelligence is critical for business success.

♦️ It helps you identify potential cash shortfalls.

♦️ It helps you take proactive measures to address them.

♦️ It helps you strategically manage cash flow to support long-term goals.

♦️ It helps you avoid insolvency and financial distress.

👉 𝐇𝐞𝐫𝐞 𝐢𝐬 𝐰𝐡𝐚𝐭 𝐓𝐡𝐞 𝐂𝐚𝐬𝐡 𝐅𝐥𝐨𝐰 𝐂𝐡𝐞𝐚𝐭 𝐒𝐡𝐞𝐞𝐭 𝐢𝐧𝐜𝐥𝐮𝐝𝐞𝐬:

🎯 The 5 Types of Cash Flows compared, with their components

🎯 The Direct vs. Indirect Cash Flow comparison

🎯 10 critical Cash Flow Ratios from which to choose your KPIs

🎯 The Cash Conversion Cycle Diagram + Formula

🎯 The 3 Main Cash Flow Drivers and 30 sub-drivers

🎯 The difference between EBITDA and (Operating) Cash Flow

🎯 The 5 Steps to Manage your Cash Flow

🎯 The Cash Inflows and Outflows

🎯 The relevant and incremental Cash Flows in Capital Budgeting

🎯 The 16 Cash Flow Mistakes to Avoid

🎯 The Revenue to Cash Waterfall

🎯 The 15 Benefits of Effective Cash Flow Management

Use this Cheat Sheet to improve your cash flow knowledge.

And help others to the same.

Download a free high resolution image here

If you’re looking to buy the full resolution PDF you can find it in my store

The Cash Flow Masterclass gets 5* Reviews!

~ Executive and Portuguese Versions now Available ~

s⭐⭐⭐⭐⭐ 

4. 20 EBITDA Adjustments

EBITDA Gets adjusted all the time.

But adjusted EBITDA is still not cash.

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1// Provisions and Reserves

Guarantees. Future tax obligations. Asset Retirement Obligations. Asset impairment.

🎯 These are potential future cash payment obligations, but while they shouldn’t reduce your current EBITDA, the future changes in their associated balance sheet accounts might.

2// Non-operating income

🎯 This is usually passive income which isn’t related to your company’s core operations.

🎯 If your company isn’t actively in the business of generating that income, it shouldn’t be part of your EBITDA.

3// Unrealized gains or losses

🎯 These are increases or decreases in the value of an asset or a liability that you haven’t yet sold or settled.

🎯 Paper gains and losses don’t belong in EBITDA.

4// One-time revenue or expenses

🎯 These are the result of non-recurring transactions.

🎯 If they aren’t repeatable and the objective is to assess the economic value of recurring cash flows, they may not belong in EBITDA.

5// Foreign exchange gains or losses

🎯 These may be the result of foreign exchange transactions outside your company’s core operations.

🎯 Alternatively, if your business is carried out in international markets, FX gains and losses definitely belong in your company’s EBITDA.

6// Goodwill impairment

🎯 This is a decrease in the value of your reported goodwill reported following an acquisition.

🎯 While this indicates concerns regarding the original price paid in the acquisition, it is still a “paper loss” that doesn’t belong in EBITDA.

7// Asset write-downs

🎯 These are decreases in the value of an asset, usually following non-recurring events like sharp technological advancements that rendered your machine obsolete ahead of its time.

🎯 Because they’re non-cash, they don’t belong in EBITDA.

8// Litigation or insurance expenses outside the regular course of business.

🎯 These are the result of non-recurring transactions such as one-time lawsuits, large financing deals or outlier commercial contracts.

🎯 If they aren’t repeatable, they probably don’t belong in EBITDA.

9// Excessive Owner compensation

🎯 In private companies, owners often pay themselves more than a comparable executive role would pay an employee.

🎯 A buyer will usually adjust the owner’s salary to level up to the market and will impact EBITDA in the process.

10// Share-based compensation

🎯 In the words of Warren Buffet, “If options aren’t a form of compensation, what are they? If compensation isn’t an expense, what is it? And if expenses should not go into the calculation of earnings, where in the world should they go?”

11// Below Market Compensation

🎯 This is general labor compensation above or below the fair market value of what a similar company would expect to pay to manage that type of human capital.

🎯 If there’s a material difference driven by non-arms length arrangements, you should adjust it to align with the market.

12// Personal Expenses

🎯 These are automobile expenses, insurance, legal and professional fees, home utilities, personal telephone, and payroll - all paid for the benefit of your non-arms length third parties

13// Travel and Entertainment Expenses

🎯 This includes your travel and entertainment expenses personal to the business owner and non-arms length third parties, and deemed unnecessary for a new owner to operate the business.

14// Pension Expenses

🎯 This includes your pension expense and other ancillary costs paid for the personal benefit of the business owner and other non-arms length third parties.

15// Professional Fees

🎯 This includes your professional legal, accounting and other advisory fees that another owner wouldn’t be expected to incur.

16// Aggressively expensed/capitalized items

🎯 This includes aggressive accounting decisions driven by your current management decisions, even if they are in compliance with applicable accounting principles.

17// Fair Market Rent

🎯 This includes below or above market rental costs due to your non-arms length agreements, which should be adjusted to reflect a fair market cost.

18// Tax Minimization Strategies

🎯 This includes accelerating expenses and/or deferring income as a result of you implementing basic year-end tax-planning techniques used to manage income taxes.

19// Severance Costs

🎯 This includes costs incurred as part of your one-time reorganization where staff was laid off.

20// Percentage Of Completion Revenues

🎯 This includes the revenues you recognized on long-term contractual engagements based on the percentage of costs incurred relative to the total estimated contractual costs.

🎯 Your high interim EBITDA on Percentage of Completion contracts is always at risk of reversing into losses resulting from underestimated project costs.

Visit my digital store to check out my viral cheat sheets and checklists

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