cash

cash

by scott pickard

Cash is king, as the old saying goes. It is the one resource a company cannot survive without for any length of time until the doors are closed, voluntarily or involuntarily, which is why the CEO must find or develop a method to reliably understand and predict the company’s current and future ability to generate the cash it needs to pay all of its bills.

Forecasting cash flow is much easier than it used to be, thanks to the convenient number-crunching power of PCs and spreadsheet software which allows one to build an Integrated Spreadsheet which links a projected balance sheet and income statement for the business. The Integrated Spreadsheet is a tool that will give any CEO the positive direct control they must have over the financial rudder of the business.

A wise time investment for CEO’s
A company’s cash flow at any point in time is a juxtaposition of payables, receivables, debt service, capital expenditures, sales/repurchases of stock, and other factors. An Integrated Spreadsheet handles this complex financial interaction with electronic precision. Using this tool, a CEO can more carefully predict where the company is heading. That’s powerful planning and peace of mind for the executive/owner that shoulders the burden of consistently meeting payroll and staying current with suppliers on all bills.

  • The Integrated Spreadsheet gives the CEO a rational way to appropriately pace capital expenditures, quarterly (or even monthly) bonus payments, and sweeps of excess cash into less liquid but higher-returning financial instruments at the earliest possible time.
  • The Integrated Spreadsheet allows the CEO to look at the effect on cash from big-picture business initiatives such as acquiring a new business, selling off a division, developing and staffing a new department, or launching a new product line.
  • Using an Integrated Spreadsheet helps the CEO disclose mistakes that are sometimes made in monthly financial statements from either miscoding or a faulty accounting interpretation of a particular transaction.
  • With an Integrated Spreadsheet the company always has a three-year plan that is built on actual operating numbers, but fine-tuned to reflect management’s best judgment of future revenues and expenses.
  • The Integrated Spreadsheet can easily generate an unlimited number of graphs to analyze past performance and predict future performance which is often the most effective way to communicate financial data to employees, directors, shareholders, and the bank.
  • An Integrated Spreadsheet will demonstrate to the bank, board, and investors that the financial management and budgeting of the company is under control which promotes confidence in the officers and the business by its internal and external constituents.

DIY

Assuming the user knows their way around a spreadsheet and double- entry accrual accounting, the structure of an Integrated Spreadsheet can be set up in a few hours. It will take a day or so to input the previous twelve months of operating data; a day to input informed estimates of revenues, expenses, and capital expenditures for the next twelve months and to fine-tune those estimates; and a day to train all users who will have access to the Integrated Spreadsheet.

If the CEO cannot spare the time, this task can be delegated to inside accounting staff or subcontracted to an outside accountant or consultant. If this project is delegated, it is still important that the CEO be trained in the use of the Integrated Spreadsheet so that he or she can perform what-if analyses and generally watch over the constantly revising forecast of the financials of the business, a function that should be owned by the CEO. Financial forecasting involves hundreds of experience-based estimates of highest-probable outcomes of revenues, expenses, capital expenditures, debt service, equity inflows and outflows, extraordinary gains and losses, and other income and expenses, by someone that has the overview of the business. The CEO has this overview as it is part of the responsibility of the position.

Basic structure of the integrated spreadsheet
It is important for the user to have a general understanding of how the spreadsheet is laid out and functions. The integrated spreadsheet has three major components:

  • Balance Sheet
  • Income Statement
  • Cash flow adjustment

These three components are linked or integrated so that they balance or tie out in accrual accounting terms. These integrated accounts are highlighted in various colors as shown on the diagram below:

cashflow

The major points of integration are identified by the matching colors. For example, the link between “depreciation” on the balance sheet and “depreciation expense” on the income statement is shown in brown, since these two entries must be identical in double-entry accrual accounting. There are in fact numerous links between the income statement and the balance sheet as a result of the double-entry methodology. The beauty of the spreadsheet is it affords the user the flexibility to add/subtract/modify at will and build increasing sophistication into the integrated spreadsheet enabling a more realistic modeling of the financial dynamics of the business.

I’ve posted a power point presentation on prezi that leads you through the basic construction of the integrated spreadsheet. The secret sauce in this process is the synching of a cash flow adjustment (plug) at the bottom of the spreadsheet below the income statement as shown in the diagram below:

2slides

By wiring together these key accounts to calculate the actual cash flow for each month, this will cause what’s known as a circular calculation in the spreadsheet which is normally a no-no, but in this case it is a good thing! The user simply needs to go into “settings” and set the automatic calculation to 100 iterations and the spreadsheet will automatically recalculate and balance the statements after each new value entry to a cell.

Using the tool

Once the integrated spreadsheet is set up, using it effectively involves inputting the actuals from each monthly financial statement as they occur and reforecasting the numbers going forward from the most recent actuals. This process repeats itself every month — inputting the most recent actuals and reforecasting ahead — and as each month goes by and the user gains experience in using the spreadsheet and making experience-based judgments of how the numbers will track, the integrated spreadsheet becomes an expert system that does a better job over time of forecasting the financial fortunes (or misfortunes) of the company. The key point is that all of this boils down to one most important account: cash flow.

Once the process of updating actuals and forecasting ahead is complete,
the CEO looks at the impact on cash and then develops a financing plan
that optimizes the uses of working capital in the next six months and beyond.
If the projected cash flow shows surpluses being generated, the CEO can
decide how that excess cash could be used today and in the coming months
to:

  • Reduce payables
  • Reduce long-term debt
  • Make capital expenditures
  • Make other long-term investments

If the projected cash flow is negative, the CEO must plan for how the
minimum working capital requirements for the business will be generated to
carry the company through tight cash periods by a combination of:

  • Drawing down cash surpluses
  • Deferring certain operating and capital expenditures
  • Extending the payables cycle for a brief period within acceptable bounds
  • Making a draw on an operating line of credit
  • Securing additional long-term financing
  • Raising equity capital through the sale of common or preferred shares

Summary

If the CEO can build the integrated spreadsheet for the business and start using it each month ( if not each day), learning by doing is the most efficient user’s manual. The CEO will quickly discover the many dimensions of value that are derived from the integrated spreadsheet aside from the very tangible value of forecasting cash flow. The integrated spreadsheet causes the user to think about every aspect of the business, across all accounts, across time, across strategies, by looking back to look forward. And at the end of the exercise instead of saying, “I hope we’ll have the money in the bank when we need it,” the CEO can say, “We expect to have the cash we need, and here’s how.”

That’s powerful business confidence!

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Budgeting


Successful Implementation of a Long-Term Energy Management Program

by Scott Pickard

energy management

The Concept

Content

  • Getting started
  • Resources
  • Incentives
  • Developing a written plan
  • Presenting to decision makers
  • Costing, budgeting, ROI
  • Financing the ECRMs
  • Bidding, contracting, managing contractors
  • Monitoring and reporting energy results
  • Dealing with human behavior and its impact on success
  • Continuous improvement

Education materials

  • self-published book in paperback, e-book, online form
  • power point presentation >> PDF
  • live webinar(s) >> video(s)
  • video interviews/profiles of successful programs
  • annual “implementation” workshop

Presentation styles

  • in person
  • in live webinar
  • in pre-recorded webinar
  • in written format

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Debt in retirement

We’ve chosen to keep our mortgage in retirement.  We refinanced to take advantage of the historically low rates and that  has dropped our monthly payment amount which is good during retirement mode.  And we get to keep the deduction for mortgage interest which helps at tax time.  If something comes up where we will need some cash (emergency; health issues; remodeling), we can easily open a Home Equity Line of Credit (HELOC) and also get a deduction for the interest on that loan.  With bank, CD, and mutual fund rates so low, for our house in our neighborhood in our town, it is the most reliable performing asset we have, having consistently appreciated over the long term (30 years).

The Heilmeier Catechism Visits the University

by scott pickard

About two years ago, one of our major corporate sponsors came to town to inform us that the rules of the sponsored research game would be changing: If the research output we were delivering was not being used and integrated into their operational and manufacturing operations; and, it was not aligned with their current strategic priorities, then that particular research would no longer be financially supported.

That was a sobering message at the time.  Previous to this meeting we had enjoyed a happy relationship for many years where we would propose interesting research themes, the sponsor would approve and give us notice to proceed, and then we would pursue this research in the traditional way involving graduate students over a 1-2 year timeframe.  Every fall they would travel to our campus where we would present those results at an end-of-year, two-day review meeting that mashed up corporate and academic researchers and graduate students in an intellectually stimulating and enjoyable format.  When it was over, everybody was smiling and shaking hands as we returned to our respective offices and labs to do it all over again.  But now, the harsher (we first thought) new message to us in so many words was, that research approach would no longer cut it.

So from that day forward, we proceeded to go through a constructive transition and reengineering process with the sponsor where we listened a lot and did our best to learn and apply some new principles and tools that they recommended to guide the development of our next research proposals, plan, and budget.  It’s fair to say that our transition to and acceptance of this new level of accountability was stressful and possibly not easily embraced by all faculty.

You see, University faculty researchers pride themselves as big thinkers working on the big ideas out on the leading edge of current knowledge, and this kind of research cannot be “put on the clock” because researchers are attempting to stretch the limits of current knowledge and it is therefore a very risky endeavor with no guarantee of success.  Many great world-changing innovations have been built on the “shoulders of giants,” but only after many iterations of research trials and failures.

Also, the academic research culture has a very strong immune response against any corporate-like tactics such as project management, milestones, and performance metrics.  If this sounds like a criticism, it’s not, it’s just the way it is and has been for a long time, and history has shown that when given enough time and money, academic research has yielded some of the most fantastic and world-changing discoveries underpinning our society.

So why the sudden change of tune from the sponsor?  What’s the problem?

The problem is, our global community is under extreme economic pressure that has been building over years which is threatening the financial sustainability of countries, states, cities, corporations, and yes, even universities.  The impact can be seen, heard, and felt in major corporations that are forced to deliver more for their internal and external (sponsored) research dollar, which tends to push their research priorities a bit closer to the applied side of the scale.  And it’s not just corporations that are bringing this message, but also our major federal research sponsors.  What they really want, if they can get it, is both: breakthrough technology over the medium to long-term , while also demonstrating to politicians and taxpayers some real applied results in the near-term for obvious political and accountability reasons.

There should be no surprise in this behavior because this is what we do as individuals, families, groups, organizations, and governments when times get tight and tough, and we have to adapt to these conditions as necessary.  In this particular case, these were the new requirements from the sponsor:

The research topics we proposed needed to be in alignment and support the strategic priorities of the sponsor.  In our defense, we had never seen such a list from our sponsor.  It was revealing and something we needed to see.  How else could you be in alignment?

Each specific research project we proposed needed to be assessed and validated by the (well-known) Heilmeier Catechism.  I put (well-known) in parenthesis because at that time, there were maybe a few faculty researchers who were vaguely familiar with the Heilmeier Catechism (questions), but none of them had ever been truly accountable to them.  Heilmeier used this standard set of questions at DARPA to review and screen new R&D projects or funding proposals:

  • What are you trying to do? Articulate your objectives using absolutely no jargon.
  • How is it done today, and what are the limits of current practice?
  • What’s new in your approach and why do you think it will be successful?
  • Who cares?
  • If you’re successful, what difference will it make?
  • What are the risks and the payoffs?
  • How much will it cost?
  • How long will it take?
  • What are the midterm and final “exams” to check for success?

Each proposed research project had to be summarized in a “quad chart” which put visual organization to the answers to the Heilmeier Catechism and put a no-nonsense look-and-feel to each research proposal value proposition.

A sample quad chart from a DARPA project.

It should be made clear that this particular case is about one sponsor on one funded center and it did not instigate a sweeping change in research practices across all researchers and projects at the University.  The academic research culture, traditions, protocols and processes at this University have been forged since the 1800s, so no one sponsor or event is going to change that overnight in any revolutionary way, and, why should it?  It  is a research model that has worked spectacularly as measured by the generation of fundamental research and intellectual property integrated across all U.S. research universities over 100 years and is the envy of the modern world.

Even so, we did respond to our sponsor’s new requirements in the following ways:

  • We developed an increased sense of urgency about what was at stake.  We had enjoyed a long, trusting, and we think successful relationship with this sponsor which we highly valued, so we were strongly motivated to maintain and strengthen that relationship if we could.
  • We listened harder to what our sponsor was saying about what was strategically important to them, and built a research plan to support those priorities.
  • We strived for a mutually-acceptable balance between the need to show practical results, and the need to stay true to our mission as a premier research university.  Our sponsor understood and respected our commitment to leading-edge research which provides high-quality experiences for our graduate students that prepares them for productive and successful careers in academia and industry.  That’s why they came to us in the first place.
  • We improved our two-way communication channels by more calls, on-site visits (both directions), and by deploying  a secure collaboration platform (messaging, file sharing, to-do lists, milestones) for day-to-day connectivity.
  • As requested by the sponsor, we addressed the Heilmeier questions at the front-end of each project and later assessed and defended our results against the Catechism at the back-end of each project.

Today, we still enjoy a strong and ongoing research collaboration with this sponsor and there is no question that we have fundamentally changed for the foreseeable future the way we work together.  But it would not be true that the “Heilmeier way” has gone viral across all of the University’s researchers and projects – far from it.  But we must acknowledge that this experience made an impact on our organization and from a technology transfer perspective – not a blue-sky research perspective – it was a useful and positive impact.

Any research operation whether corporate, university, or national lab would be well-served to seriously consider the merits of the Heilmeier principles.  Two articles about Heilmeier give a good overview of the game-changing impact this man and his Catechism have been making on high-technology development since his ground-breaking work with liquid-crystal displays (LCD) at RCA Laboratories in the ‘60s:

Based on his work with LCDs, Heilmeier received the 2012 Draper Award “for the engineering development of the LCD that is utilized in billions of consumer and professional devices.”  But the legacy of his achievements most visibly lives on through these nine simple questions which continue to be adopted and adapted by researchers, engineers, managers and entrepreneurs to inspire and guide the development of new products and solutions.

So if it’s true that every innovation starts with a question, then clearly we need to take care to ask the right questions.

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