Module No 4: Financial Management in micro-enterprises

1. MICRO: Enhancing Competitiveness of Micro-enterprises in Rural Areas Module No 4: Financial Management in micro-enterprises Prepared by the Consortium for the project: “Irish Rural Link – National University of Ireland Maynooth- CDI – EEO GROUP SA- IHF asbl – IDP - Internet Web Solutions SL”

2. Cash Flow Essentials Overview

3. Cash Flow Essentials Unit Aim The Unit provides an Introduction to Cash flow management, especially in agri-business

4. Cash Flow Essentials At the end of this module you will be able to: • Know about cash flow management • IdentifyCash for agri-business • Carry out an exercise in the flow of cash in a Business Expected Learning Outcomes

5. Cash Flow Essentials Cash flow management • is a process that involves collecting payments, controlling disbursements, covering shortfalls, forecasting cash needs, investing idle funds, and compensating the banks that support these actions. • cash flow management requires coordination between treasury and operations. • Technology and electronic systems for gathering diverse financial information and formatting it into useful reports for decision making.

6. Cash Flow Essentials Cash for agri-business • Cash flow management can be practiced to a point where every available euro is at work either covering payment of cheques or producing income. • cash flow management continues to be a complex process -- and increasingly so on the agribusiness

7. Cash Flow Essentials Critical question Sources and applications of cash • the issue of what was done with business income. • used to purchase additional machinery and equipment • used to expand the business and/or buy additional land • used for higher family living expenditures. • diversified investments away from the farm • How much should go to increase the farm cash reserves?

8. Cash Flow Essentials An exercise From Manchester Science Enterprise Centre

9. Cash Flow Essentials Your Costs • Raw materials and equipment • Wages • Taxes • Utility bills – gas, electric, telephone, postage etc • Premises (Rental or Mortgage) • Delivery costs • Loan repayment • Marketing and advertising costs Manchester Science Enterprise Centre

10. Cash Flow Essentials Your Cash Inflows • Investments • Sales of goods • Subscriptions to services • Sale of Intellectual Property rights • Money from royalties • Sale of assets Manchester Science Enterprise Centre

11. Cash Flow Essentials Break even analysis • Need to sell enough product to cover costs = Break even point • Variable costs: varies in proportion to production e.g. raw materials • Fixed costs: does not change e.g. Rent, wages • Fixed costs contribution per unit decreases when you make more products ! Manchester Science Enterprise Centre

12. Cash Flow Essentials Cash Collections Purchases Accounts Receivable Materials Sales Accounts Payable Finished Inventory Production Working Capital Cycle Manchester Science Enterprise Centre

13. Cash Flow Essentials Three main statements • Balance Sheet – A ‘snap shot’ of the company’s financial situation at a point in time (e.g. end of year) • Assets, Liabilities, Owner’s Equity • Profit and Loss Statement – From…..to…. (Usually 12 month period) • Income (Revenue) and Expenses • Cash flow Statement – From ….to…. • Sources of Cash in and Cash out Manchester Science Enterprise Centre

14. Cash Flow Essentials Sale of Fixed Assets Owner’s Investment Borrowed Funds Flow of Cash Through a Business Cash Sales Collection of Accounts Receivable Cash Purchase of Fixed Assets Payment of Expenses • Small Business Management, 11th edition • Longenecker, Moore, and Petty • 2000 • South-Western College Publishing Payment for Stock Payment of Dividends Manchester Science Enterprise Centre

15. Cash Flow Essentials Cash Flow (1/2) • The flow of cash into and out of a business • Can be net positive or negative • Continuously moving picture • Especially important for a new start-up company- may update daily! • NOT simply sales minus expenditure 15 Manchester Science Enterprise Centre

16. Cash Flow Essentials Cash Flow (2/2) Positive Cash Flow Essential Essential Profits Desirable Essential Short Term Long Term Cash is King 16 Manchester Science Enterprise Centre

17. Analysing Cash Flow Cash Flow Essentials • Net Cash Flow +ve or –ve? What are the problems? • Determine main causes of problem – costs or income? • Profitable companies with full order books can still fail ! Use the Pareto (80:20) Rule 17 Manchester Science Enterprise Centre

18. Profit and Loss Statement Cash Flow Essentials • A report on expenses and income over a period of time. • Displays Profit. • How does that relate to cash? • Some Terms: • Sales/Turnover • Cost of Goods sold • Gross Profit • Net Profit 18 Manchester Science Enterprise Centre

19. Profit and Loss Details Cash Flow Essentials Sales Less:Cost of Goods sold = Gross Profit Less: Operating Expenses = Operating Profit or Earning before interest and Tax (EBIT) Less: Interest =Earnings before Tax (EBT) Less: Tax = Net Profit 19 Manchester Science Enterprise Centre

20. Balance Sheet Cash Flow Essentials 20 Manchester Science Enterprise Centre

21. Why do this ? Cash Flow Essentials • To show investors you are profitable (or to forecast profitability) • To identify areas where the company could improve and identify potential problems • To show investors you are efficient • To show customers and suppliers you will still be around next year ! • It may be required by law ! 21 Manchester Science Enterprise Centre

22. Thank you for your attention  End of Module