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Cash flow analysis

I have a client who wants a cash flow analysis. It's a manufacturing company, they currently require 50% deposit on all orders greater than $10k. One of the customers wants to increase $1-2million(10-15%) more orders if we eliminate the deposit requirement but pay Net 15, Instead of Net 30. Any suggestions on what ratios or analysis I need to do?


Deep Gujral
Title: Principal, Advisory Services
Company: Withum
(Principal, Advisory Services, Withum) |

I would suggest creating an analysis that examines the impact on the DSO ratio.

Len Green
Title: Performance Improvement Consultant and E..
Company: Haygarth Consulting LLC
LinkedIn Profile
(Performance Improvement Consultant and ERP Strategist, Haygarth Consulting LLC) |

You may have a few components to evaluate:
1. Cash flow from increased margins
2.Cash flow changes from revised payment terms by customer
3. Cash flow changes from higher inventory purchases from suppliers (and maybe some expenses too -if they change directly because of the new volumes).

Topic Expert
Wayne Spivak
Title: President & CFO
LinkedIn Profile
(President & CFO, |

Did you look at their credit and the ability to pay?

Also, you don't mention the build time. How long do you hold their money until you deliver?

What do you do with deposits? Do you put them in a "job deposit account" or are they part of your operating account?

Ken Black
Title: Accounting
Company: Accountemp
(Accounting, Accountemp) |

The lead time is, on average, 47 days. This customer, on average, has been paying 5 days over N30. All the money is used as operating cash. The data I'm looking at is from Jan 2015 to April 2017

Jake Feldman
Title: Managing Director
Company: Global TaxFin Advisory Group LLC
(Managing Director, Global TaxFin Advisory Group LLC) |

If you really believe that offering better terms would increase sales, then this is a no brainer because just about any increased profit would outweigh the small time value of money cost. But I would wonder whether the customer intends to increase purchases anyway and is just using this as a psychological carrot. If you want to analyze this as an NPV problem, you can compare in Excel:

Current terms NPV = Sales*((0.5+0.5*(1+discount rate)^(-30/365)))


Proposed terms NPV = Sales*((1+discount rate)^(-15/365))

Above assumes no change in sales. If there is increased Sales, you would need to introduce terms in both equations for COGS also on a time value of money basis, i.e., COGS discounted (or really compounded to future value at time 0 if manufactured before time 0) to when costs are incurred.

Ken Black
Title: Accounting
Company: Accountemp
(Accounting, Accountemp) |

Can you please elaborate? Thanks

Jake Feldman
Title: Managing Director
Company: Global TaxFin Advisory Group LLC
(Managing Director, Global TaxFin Advisory Group LLC) |

You would add to the NPV equations above:

COGS*((1+discount rate)^(+manufacturing lead time/365))

Here lead time is brought forward in time (+sign) from when the item is made to the present time. The Sales and COGS would be different in Current and Proposed terms if there is a sales effect.

Mark Gandy
Title: Founder/Owner
Company: G3CFO
LinkedIn Profile
(Founder/Owner, G3CFO) |

Can you get this customer to commit to a contract which includes penalties if they don't hit certain volume requirements? I'd word the contract to allow you to back off the new terms to more stringent terms if they ever go one day late.

Furthermore, and if yes to above, I'd try getting payment via ACH over the first 60 or 90 days to build the trust for this new arrangement.

The points above address Len's third bullet point as the contract helps to smooth out the vendor/supplier requirements.

If your client can negotiate all or part of the above, it's a no-brainer to borrow Jake's term.


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