Where Did All My Profits Go? Mastering the Concept of Working Capital (Series: MBA Shortcut)

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Practical and entertaining education for
attorneys, accountants, business owners
and executives, and investors.
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DISCLAIMER
The material in this webinar is for informational purposes only. It should not be
considered legal, financial or other professional advice. You should consult with an
attorney or other appropriate professional to determine what may be best for your
individual needs. While Financial Poise™ takes reasonable steps to ensure the information
it publishes is accurate, Financial Poise™ makes no guaranty in this regard.
About this PowerPoint: if you are looking at this PowerPoint without the benefit of
listening to the conversation that surrounded it then you are doing yourself a disservice.
This PowerPoint was prepared in contemplation of being viewed in conjunction with
listening to a one hour webinar on the topic
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MEET THE FACULTY
Moderator:
Jonathan Friedland – Sugar Felsenthal Grais & Helsinger, LLP
Panelists:
David Maughan – Ankura Consulting Group
Michael Schwarzmann – Independent CRO and Restructuring Advisor
Randy Wilson – Cendrowski Corporate Advisors LLC
Ken Yager – Newpoint Advisors Corporation
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ABOUT THIS WEBINAR: Where Did All My
Profits Go? Mastering the Concept of
Working Capital
Stated simply, Working Capital = Current Assets - Current Liabilities. This equation helps a company
(and its financing sources) understand whether it has enough short term cash inflows to cover its short
term cash outflows, also referred to as liquidity. But it’s not as simple as that. And, because it is the
elemental center of cash flow, which in turn is the lifeblood of any business, it deserves much attention.
Understanding the various parts of working capital will allow you to develop a plan for taming your
working capital and, instead, have it work for you. In this webinar you will learn what parts of the
balance sheet make up working capital and what actions cause the most problems with cash flow. It also
covers best practices for managing working capital that will allow you to avoid working capital issues
that can negatively impact cash flow, tax acceleration and make financing difficult to find.
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ABOUT THIS SERIES: MBA Shortcut
“If you don’t know your numbers, you don’t know your business.” This is a common refrain
that is equally applicable to attorney and other consultants who work with businesses.
This webinar series is designed for you if you are a startup founder, business owner,
executive, investor, attorney or consultant who, though not a finance or accounting
professional, finds herself needing to understand finance and accounting. It won’t make
you an expert but it will give you the tools you need to speak with experts in order to get
more out of them and it will provide a solid foundation on which you can build.
Packed with illustrative examples, helpful anecdotes and real-world case studies, this series
teaches you some of the key take things you need to understand about finance and
accounting.
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EPISODES IN THIS SERIES
3/7/19 Episode #1:
EBITDA and Other Scary Words
4/4/19 Episode #2:
How to Read a Balance Sheet –And Why You Care!
5/9/19 Episode #3:
The KPI- Cash Flow Modeling and Projections
6/6/19 Episode #4:
Where Did All My Profits Go? Mastering the Concept of Working
Capital
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Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.

Episode #4:
Where Did All My Profits Go? Mastering
the Concept of Working Capital
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CONCEPTS COVERED IN PAST
EPISODES OF THIS SERIES
• EBITDA & Other Scary Words
• Balance Sheet Understanding & Analysis
• Key Performance Indicators (“KPI”)
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INTRODUCTION TO WORKING
CAPITAL
• What is Working Capital?
✓ Working Capital = Total Current Assets - Total Current Liabilities
✓ Positive working capital implies a company is able to pay off its short-
term liabilities
✓ Negative working capital implies a company is unable to meet short-
term liabilities with current assets
✓ Sometimes also referred to as “Circulating Capital” or “Short Term
Capital”
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WORKING CAPITAL VS. FIXED
CAPITAL
• Fixed Capital=required for establishing a business
• Working Capital= required to utilize a business’s fixed assets
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WHAT ARE CURRENT ASSETS?
• Cash and, generally, other assets that can be converted into cash easily, or
within one year/accounting period.
• Examples:
✓ Cash
✓ Receivables
✓ Inventory
✓ Marketable securities
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WHAT ARE CURRENT LIABILITIES?
• Generally, obligations requiring cash outflows due within one year/accounting period
• Examples:
✓ Accounts payable
✓ Accrued expenses such as salary & wages and taxes
✓ Interest and debt due within one year
✓ Some warranty liability
o If a company offers a multi-year warranty the bulk of the warranty liability
would probably be a long-term liability
✓ Unearned revenues
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THE IMPORTANCE OF WORKING
CAPITAL
• Maintaining Liquidity
✓ Understanding Working Capital key to preserving company’s liquidity
position
• Lender & Investor relations
✓ Working Capital used by current or potential lenders & investors to
measure company’s strength/creditworthiness
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WORKING CAPITAL AND THE
OPERATING CYCLE
• Company’s operating cycle understood as time take to convert raw
materials or inventory stock into cash
• Working Capital directly affected by company’s operating cycle
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TYPES OF WORKING CAPITAL
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GROSS WORKING CAPITAL
• Broad measurement
• Sum of all current assets (assets that are convertible to cash within a
year or less)
• Helps in determining return on investment in working capital and
providing correct amount of working capital at right time
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NET WORKING CAPITAL
• Sum of all current assets less sum of all current liabilities
• Helpful when tracked on trend line to show gradual
improvement or decline
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NET WORKING CAPITAL –
POTENTIAL PITFALLS
• Anomalies
✓ Isolated measurements may reflect anomalies in working capital
skewing view of operations
o e.g. net working capital measured at point in time where large, 1-
time account payable unpaid, creating appearance of smaller net
working capital figure.
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POTENTIAL PITFALLS (cont’d)
• Lines of Credit
✓ Despite negative net working capital, company may still have line of
credit capable of covering short-term funding shortfalls
✓ More nuanced view: plot net working capital against remaining
available balance on the line of credit
✓ If line of credit nearly used in total, greater potential for liquidity
problems
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POTENTIAL PITFALLS (cont’d)
• Liquidity
✓ Current assets not necessarily very liquid
✓ May not be available for use in paying down short-term liabilities.
o e.g. inventory may only be convertible to cash at steep discount;
A/R may not be collectible in short term
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TYPES OF WORKING CAPITAL: BASIS
OF TIME
• Permanent/Fixed Working Capital
✓ Regular Working Capital
✓ Reserve Working Capital
• Temporary/Variable Working Capital
✓ Seasonal Working Capital
✓ Special Working Capital
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PERMANENT/FIXED WORKING
CAPITAL
• Minimum investment required working capital regardless of fluctuation
in business activity
• “Permanent” is a misnomer
✓ Permanent/Fixed Working Capital not fixed forever
✓ Measured annually and influenced by company’s growth/contraction
in given year
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PERMANENT/FIXED WORKING
CAPITAL (cont’d)
• Regardless, useful to company when making decisions relating to
financing mix to cover working capital gaps
• Permanent Working Capital can be financed with long term sources of
funding: equity, debenture, long-term loans etc.
✓ Long-term sources of financing usually cheaper than short term
sources
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TYPES OF PERMANENT/FIXED
WORKING CAPITAL
• Regular Working Capital: permanent working capital normally required
in company’s ordinary operations for working capital cycle to flow
smoothly
• Reserve Working Capital: working capital cushion company must
maintain over and above regular working capital for contingencies which
may arise due to unexpected situations.
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TEMPORARY/VARIABLE WORKING
CAPITAL
• The difference between Net Working Capital and Permanent Working
Capital
• Stated another way: temporary fluctuation of Net Working Capital
over and above Permanent Working Capital, based on additional
Working Capital requirement arising out of demand for product
during specific period or at specific time
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TYPES OF TEMPORARY/VARIABLE
WORKING CAPITAL
• Seasonal Working Capital
✓ Fluctuation in Net Working Capital caused by effect of season
o Examples: agricultural products; school or sports uniforms; audit
deadlines, local festivals; etc.
• Special Working Capital
✓ Fluctuation in Net Working Capital caused by special unforeseen event
o Examples: extreme weather conditions (extreme heat or cold); floods;
famine; sudden change in government policy
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WHY CLASSIFY TEMPORARY/
VARIABLE WORKING CAPITAL?
• Temporary Working Capital preferably financed by short-term financing sources
• Despite long-term sources of finance being cheaper, may be beneficial to adopt short
term financing in relation to Temporary Working Capital because long term financing
not easily redeemed
• Short term finances have time flexibility, can be used and repaid when purpose is
served.
• Example: cash credit limit extended by lender. Interest on accrues on amount used for
period of use only. Idle cash can be utilized to pay off outstanding short term finances
and save on interest cost long term
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FORECASTING
• Companies must be able to measure relevant Working Capital history to develop
accurate projections of future Working Capital needs and determining potential
financing needs
• Will aid in projecting company’s ability to grow over time
• Can better understand working capital trends by analysis of working capital
components as follows:
✓ Days Sales Outstanding as a measure of how many days, on average, Accounts
Receivable are paid.
✓ Inventory Turns as a measure of how quickly, on average, Inventory is sold
✓ Days Payables Outstanding as a measure of how many days, on average, Accounts
Payable are paid.
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WORKING CAPITAL MANAGEMENT
POLICIES
• Companies may employ specific policies governing Working Capital
Management to maintain satisfactory levels of Working Capital
• Considerations:
✓ Profitability, Risk, & Liquidity
✓ Composition & Level of Current Assets
✓ Composition & Level of Current Liabilities
✓ Industry
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HOW PAYMENT TERMS CAN IMPACT
WORKING CAPITAL
• Positive impacts to working capital
✓ Shorter customer terms
✓ Longer vendor terms
✓ Just in time vendor deliveries
✓ Low minimum vendor order quantities
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HOW PAYMENT TERMS CAN IMPACT
WORKING CAPITAL (cont’d)
• Negative impacts to working capital
✓ Longer customer terms
✓ Shorter vendor terms
✓ Long vendor lead times
✓ High minimum vendor order quantities
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ABOUT THE FACULTY
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Jonathan Friedland – jfriedland@sfgh.com
Jonathan Friedland, a senior partner with Sugar Felsenthal Grais & Helsinger, LLP, views his job
simply: to make money for clients whenever possible and to protect their interests at every turn.
Licensed in four states, Jonathan’s transactional work focusses on representing private funds and
other owners of private businesses, and the businesses they own. He regularly advises on M&A
activities, structuring new ventures and restructuring old ones, and on other commercial
relationships. Jonathan is rated AV® Preeminent™ by Martindale-Hubbell, 10/10 by AVVO, and
enjoys several other similar distinctions. Jonathan graduated from the State University of New York
at Albany, magna cum laude (in three years) and from the University of Pennsylvania Law School.
He clerked for a federal judge before entering private practice and served for several years as an
Adjunct Professor of Strategic Management at the University of Chicago’s Graduate School of
Business. Jonathan is lead author and editor of several significant treatises, several chapters in
other treatises, and scores of articles on law and business.
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David Maughan – David.Maughan@ankura.com
David Maughan is a Senior Managing Director. Prior to joining Ankura, he was a
supervisory principal with Navigant Capital Advisors, the dedicated corporate finance
business unit of Navigant Consulting Inc. David is a dual national Canada/US and is based
out of the New York office. David is a career investment banker who has executed a broad
range of corporate finance assignments.
David has provided specialty financial advisory services to operating and financial
companies for more than 40 years. During that time, he has worked with major companies
and in entrepreneurial environments in the US, Canada, and Japan.
David has executed private placement transactions in equity and debt and enjoys robust
relationships with a large cross-section of private equity and hedge fund investors.
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Michael Schwarzmann – michaelschwarzmann@yahoo.com
Michael Schwarzmann has over 20 years’ experience helping identify opportunities to create value for his
clients. I have extensive experience working with established companies when they encounter financial
difficulties by assisting them in developing solutions to address short term cash needs and longer term
profitability. My process includes helping to identify cost savings and value capture scenarios by analyzing
historical financial performance along with current operations and projecting optimizing strategies. Utilizing
weekly and monthly cash flow statements, budgets, and forecasts, I utilize a focused, data driven approach to
identifying opportunities to increase company profitability. Through a broad review of financial, operational
and strategic performance, I help guide companies to increased profitability. Working across the organization,
vertically and horizontally, uncovers additional solutions and generates greater buy-in of the goals, objectives
and action plan, all of which are critical to maximize the impact of proposed changes. I utilize my legal
knowledge to seamlessly work with counsel to identify and address legal issues in a more cost effective manner.
I have guided the development and evaluation of business plans and formulated successful strategies to
preserve or improve asset values. I am a consensus builder. Industry experience includes: health care,
manufacturing, agricultural, construction, restaurants and franchising, energy and travel.
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Randy Wilson – rdw@cendsel.com
Randy is a Senior Manager at Cendrowski Corporate Advisors, and brings more than two decades of experience in internal
corporate and government investigations, fraud analyses, embezzlement detection and prevention, risk management
analysis, and forensic accounting investigations. Randy works across CCA’s accounting and financial services, litigation
support, risk services, and compliance consulting practice groups and advise clients on how to effectively assess and design
internal control programs, implement best practices, and monitor the progress of internal compliance programs.
Randy has experience across a range of industry sectors, including insurance, real estate, private equity, construction, state
and local government, professional services, colleges and universities and food service, among others. With experience in
accounting, financial reporting, and investigations, Randy regularly provides clients with counsel across a range of
regulatory and SEC investigations.
Previously, Randy directed the Chicago fraud and forensic practice as a Principal at Plante Moran, with prior experience at
PriceWaterhouseCoopers and Deloitte, where he specialized in business recovery services and investigations.
Randy graduated from Indiana University with a B.S. in Accounting and a J.D. degree from the Chicago-Kent College of
Law. He is a Certified Public Accountant (CPA), Certified Fraud Examiner (CFE), and Certified in Financial Forensics
(CFF).
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Ken Yager – KYager@newpointadvisors.us
Ken Yager is has nearly two decades of executive business leadership experience. As Financial Advisor or in CRO,
CEO and CFO roles, Mr. Yager regularly takes on profit and loss and risk-management responsibility for cash-
constrained companies in growth, leveraged-buyout and turnaround situations. He also has successfully worked on
implementing dozens of initiatives involving, operations and project management, team building, marketing, and
sales and joint-venture management. He is a fierce advocate for stakeholder rights and pragmatic transparency. Ken
has worked with clients in a variety of industries in over 60 engagements. He focuses on business services industries
including media, information services, contact centers and field services. Ken earned a Bachelor’s degree in
Management with majors in Finance and Accounting from Tulane University, A.B. Freeman School of Business, and
received a Master of Management degree from J.L. Kellogg Graduate School of Management. He later served as
President of the Kellogg Alumni Club. Ken is a member of the Chicago/Midwest chapter of the Turnaround
Management Association (TMA) and is on the International Board as the Vice President of Education and chairs the
Education Oversight Committee. He is also a member of The Commercial Finance Association (CFA). Ken is also a
member of the Association for Corporate Growth (ACG), National Association of Corporate Directors (NACD) and the
Media Financial Management (MFM) Association.
To read more, go to https://www.financialpoise.com/financialpoisewebinars/faculty/ken-yager/
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IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily
for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education.
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Where Did All My Profits Go? Mastering the Concept of Working Capital (Series: MBA Shortcut)

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