‘Cash is king’ – a concept fundamentally important for businesses to understand – was the key theme that the speaker, Mr. Benny Chan, Senior Vice President of DBS SME Banking, stressed on. Benny spoke about the function of cash as the “lifeblood of the business” and as a safety net for unexpected financial situations. He gave an in-depth explanation of the cash conversion cycle, providing business owners with a clearer understanding of how loans can assist businesses to cover financing gaps created by shortfalls in operating cash flow. Without cash, a business’ suppliers and creditors cannot be repaid, and owners face the danger of debts overwhelming the business. He also shared concrete steps that a business can take to improve its cash flow position.

1. Disclaimer: The information contained in this document is intended only for use during the presentation and should not be disseminated or
distributed to parties outside the presentation. DBS Bank accepts no liability whatsoever with respect to the use of this document or its contents.
Cashflow Management for Start-ups
Benny Chan
Senior Vice President, DBS SME Banking
May 2014

2. Agenda
• Importance of cash flow
• Three types of cash flow
• Cash conversion cycle
Understanding cash flow
• Improve cash receipts
• Manage cash payments
• Get financing from banks
Tips to improve operating cash flow

3. Why is cash flow important?
“Everybody calls me the boss.
But I am not the boss.
Cashflow is the boss.
I have to make sure my boss can support me before I
can do anything”
From: A SME owner and customer of DBS Bank
….He subsequently went bust, when his major client in US
stopped paying him during the GFC.

4. Why is cash flow important?
 Cash is the lifeblood of a business
 Cash flow is the cycle of cash inflows
and cash outflows that determine your
business' solvency
 Profit does not equal cash flow –
cash, not profit, is required to pay off
suppliers and creditors
 Having a healthy cash reserve
provides a buffer against unexpected
competition or interruptions to the
business

5. Why is cash flow important?
Bank
- Cashflow repays debt. Collateral is a second way out
- A business banker spends a huge amount of time understanding your business, your
accounts and your collection and payment cycle.
Pawn Shop
– Collateral is key. Everything else is secondary
- A Pawnshop spends most of its time valuing the item
The way a bank risk rate a corporate customer, is mainly from Cash Flow
and Cash on Balance Sheet.

6. Cash flow comes from three types of
activities
What it is called What is it Examples
Operating cash flow
Cash from operating
activities, arising from
day-to-day activities of the
business
Sale of goods or services,
purchase of inventory,
staff and utilities
expenses, changes in
working capital
Investing cash flow
Cash from investing
activities, related to non-
current assets, e.g.
machinery, buildings,
vehicles
Purchase or sale of
property, plant, and
equipment
Financing cash flow
Cash from financing
activities, related to bank
loans and owners’ equity
Repayment of debt, equity
injection, dividend payout

7. Cash conversion cycle
(Typical of a manufacturing outfit)
Day 0
Purchase raw materials
(A) 35 days credit terms
Accounts payable created
Day 30
Convert raw materials to
finished goods
(B) Takes 30 days
Day 45
Hold inventory until goods
are sold
(C) Takes 10 days
(D) 30 days credit terms
Accounts receivable
created
Day 35
Accounts payable due
Pay cash to suppliers
Operating cash outflow
Day 75
Accounts receivable due
Collect cash from
customers
Operating cash inflow

8. Cash conversion cycle
(Determining the financing gap)
30
days
10
Days
30
days 35
days
35
days
Raw Material
Conversion
Finished
Goods Held
Days
Receivables
Outstanding
Payables
Outstanding
Financing Gap

9. Cash conversion cycle
 After Day 75, the cycle restarts again from Day 0
 Financing gap between Day 35 to Day 70 is your Working Capital
Requirement
Covered by:
– Surplus cash on hand
– Working capital loans
 So what does a financing gap of 35 days mean?
(Annual Turnover) X 35/365 = Working Capital Required
Suppose your Annual Sales Turnover is $2m per annum
Working Capital Required = $191,780
if the same business is $200m Annual Sales Turnover
Working Capital Required = $19.178 million

10. Cash conversion cycle
“Look. I need to borrow money from the bank because I am small.
If my businesss is huge and successful, why would I need the bank?”
From: A small business owner applying for a loan from DBS Bank
 Excess operating cash flow (inflow > outflow) is used to:
– Repay loans
– Make investments in fixed assets (machinery, property, etc.)
– Build cash surplus
 Shortfall of operating cash flow (outflow > inflow) is taken from:
– Existing cash surplus
– Additional borrowings (from banks or other sources)
– One-time liquidation of fixed assets

11. Agenda
• Importance of cash flow
• Three types of cash flow
• Cash conversion cycle
Understanding cash flow
• Improve cash receipts
• Manage cash payments
• Get financing from banks
Tips to improve operating cash flow

12. Improve cash receipts
 Offer small discounts (1-2%) to
incentivise customers on credit
terms to pay early
 Explore payment solutions for
customers to transfer cash
conveniently
– Credit card acceptance, GIRO, d2Pay,
etc
 Have regular customers (put down
in contracts) to reduce “days to sell”
and provide recurring cash inflow
 Factoring accounts receivable
– “Sell” accounts receivable to the bank
– The bank will provide cash in advance
(for a fee) and your customers pay
directly to the bank
 LC Discounting

13. Manage cash payments
 Negotiate for longer credit terms with
suppliers
– Delaying payments helps to reduce days
financing gap
– These are interest-free line of credit from
suppliers for the business
 Make use of prepayment discounts from
suppliers for early payment
 Use extended payment plans
– Applicable to large orders of supplies,
insurance premiums, fixed assets
 Lease fixed assets instead of buying
 Look for grants or cheap sources of
financing
– e.g. iSPRINT Grant Scheme, IPG
Programme, Capability Development Grant,
DBS Micro Loan

14. Common types of financing offered by banks
Product
Suitability
for start-ups
Features
✓  Low interest rate cost
 Least collateral
 High interest rate cost
 High interest rate cost
 Low amount
 Amount depends on terms
of trade
 Relatively easy to obtain
 Low interest rate cost
 Relatively easy to obtain
 High interest rate cost
 Low amount
Micro loan
Business term loan
Overdraft
Trade import
Letter of credit; Trust receipt; Bills
receivable purchased; Working capital line
Trade export
Export bill under letter of credit; Export bill
purchase
Accounts receivable
purchase
Bills receivables sales
✓
✓
✓
✓
Top choice
For EBLC

15. Key Tips in Securing a Loan Approval
1. Completeness of Documents
- Audited Accounts (up to date)
- Personal Tax Return IR8A
- 3-6 month Bank Statements (if not applying to your primary bank)
2. During meeting with Business Banker
- Clarity of business structure, model
- Ability to explain cash flow cycle, operations
- Explain why you are confident you can repay
- Your background, experience and any information about yourself
3. Personal Commitment to business
- Readiness to give JSPG
- Level of involvement in running business
• The better you score, the better your risk rating
• Risk rating --> higher loan amount and / or lower pricing

16. END