Cash Wheel

Operatin
What is cash wheel ? g Cash

Profit plan accepted as feasible

Account The Cycle Inventor

Return to investors Receiva
y
Enough cash to ble
is sufficiently
operate (Cash
attractive (ROE
Wheel)
Wheel)
Sales
Forecasting cash
is important for all businesses because companies have
limited cash reserves and borrowing capacity.
Profit Plan not
Cash Cash feasible, need to be
Needed Reserves reworked

Example :
Fast growing company need a lot of cash to finance increases in working capital
(inventory & AR) and purchase equipment
Existing debt may limit borrowing capacity
If borrowing capacity is limited $500.000 and profit plan requires $700.000
investment in new asset, then the profit plan is not feasible

Revise Profit Plan : Reduce growth or Issuing

new Equity ?
Computing the Cash Wheel
Operating Cash Needed = Cash Received from Cust Cash Paid to supplier&
operating expense

Step 1 : Estimate Net Cash Flow from Operation

Simple technique known as EBITDA ( Earnings Before Interest, Taxes Depreciation and
Amortization)
 Step 2 : Estimate Cash Needed to Fund Growth in
Operating Assets
Consider Changes in Working Capital
 Step 3 : Price the Aqcuisition and Disvetiture of Long
Term Assets
Different strategies and initiatives will require different level of investment and
cash

Step 4 : Estimate Financing Needs and Interset

Payments
The final step, to substract the amount of cash needed (or generated by)
financing and income tax
Ensuring Adequate Cash Flow
Profit Plan Cash Flow
Projection
One Year Plan Shorter Time Periods

Cash in flows and

cash out flows is
estimated for most
business at least
monthly

All business have a significant amount of resources to tied up in account

receivable, inventory, and other working capital accounts. Managers must
work diligently to accelerate the flows of cash wheel and freeing up cash
for investment financing and operations growth