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KIPLINGER BOOKS
Washington, DC
Published by
The Kiplinger Washington Editors, Inc.
1729 H Street, N.W.
Washington, DC 20006
Library of Congress Cataloging-in-Publication Data
McGuinness, Bill.
Cash rules : learn and manage the 7 cash-flow drivers for your company’s
success / Bill McGuinness.
p. cm.
Includes index.
ISBN 0-938721-75-5 (alk. paper)
1.Cash flow. 2. Cash management. 3. Accounting. I. Title.
HF5681.C28 M345 2000
658.15'244--dc21 00-048134
© 2000 by the Kiplinger Washington Editors, Inc. All rights reserved. No part of
this book may be reproduced or transmitted in any form or by any means, electronic
or mechanical, including photocopying, recording, or by an information storage
and retrieval system, without the written permission of the Publisher, except where
permitted by law.
This publication is intended to provide guidance in regard to the subject matter
covered. It is sold with the understanding that the author and publisher are not
herein engaged in rendering legal, accounting, tax or other professional services.
If such services are required, professional assistance should be sought.
First edition. Printed in the United States of America.
9 8 7 6 5 4 3 2 1
Kiplinger publishes books and videos on a wide variety of personal-finance and
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Acknowledgments
T AKING SOMETHING I KNOW AND CARE ABOUT, IN
this case the cash-flow issues underlying almost
every business question, and then writing a book
about it proved to be a much bigger task than I
ever expected. Without the help and encourage-
ment of several key people right from the outset, I may not
have seen the job through amid the press of so many other
time demands. My heartfelt thanks to those early readers and
encouragers: Al Weitlich, my Dad, Ed McGuinness, and most
especially my lovely wife—thanks Kath for all your help and
patience with the book and with me.
A great source of wisdom who helped greatly in giving the
manuscript organization and structure was my agent, Karl
Weber, who loves books of all kinds and specializes in business
books.
Then came the talented editorial team of Arnold Dolan
and Hilary Hindsman, who mercilessly worked me and the
book over through several drafts. Last but most important is
publisher David Harrison, who carefully oversaw the whole
project and always knew when to step in and when to step
back. He became, as I guess publishers always do, the final edi-
tor and never let me stop thinking about how you, the reader,
could best be helped to understand and use the principles of
Cash Rules.
Many thanks, too, to Heather Waugh for her fine eye for
design of the book and cover and to Rosemary Neff for her out-
standing word sense.
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Table of Contents
Introduction........................................................xi
PART ONE: The ABCs of Cash Flow...................................1
Chapter 1: Cash Rules...............................................3
Why Cash Flow Is Important • Profitability versus Cashflowability
• Cash Is King • What Is Cash Flow? • Team Cash Flow
Chapter 2: Cash-Flow Language & Environment......................17
Introducing the Cash Drivers:A New Language • Cash Flow in
a Company Context • Building a Cash-Flow Culture
Chapter 3: Basic Accounting:
The Grammar of Cash-Driver Language..............................33
The Accounting Equation • The Double-Entry System
Chapter 4: Statements of Cash Flow & Analysis of Ratios............49
The Cash-Adjusted Income Statement • Long-Term Viability
& Cash Flow • Other Measures of a Company’s Well Being
• The Ultimate Cash-Flow Risk:Bankruptcy • Getting Ready
for a Closer Look at the Cash Drivers
PART TWO: The Seven Cash Drivers.................................77
Chapter 5: Sales Growth: The Dominant Driver......................79
Growth That Ripples• Marketing Mix &the Management
Effect• Growth Takes Cash• Breakeven Analysis &Contribution
Margin• Sustainable Sales Growth• Big-Gulp Sales Growth &
Cash-Flow Implications
Chapter 6: Gross Margin: First of the Fundamentals...............103
The Two Sides of Margins • Gross Margin &Contribution Margin
• Refining Gross-Margin Calculations • Distribution Channels &
Gross Margins • Gross Margin &Totally Perishable ‘Inventory’
Chapter 7: SG&A: The Other Fundamental..........................115
Cost Ups &Downs • SG&A&Capacity • Expense &
Expenditure
Chapter 8: Swing Factor #1: Accounts Receivable..................121
Communicating With Customers • A/R&the Marketing
Connection • Industry Norms • Factoring
Chapter 9: Swing Factor #2: Inventory.............................131
Inventory Valuation • Types of Inventory • Inventory & the
Production Process • Just-in-Time (JIT)Inventory • Inventory
&Purchasing Management • Inventory-Related Costs
Chapter 10: Swing Factor #3: Accounts Payable...................145
Suppliers &Inventory • Discounts • Prioritizing &
Policing Payables
Chapter 11: Keeping Up:Capital Expenditures......................151
Depreciable Life &Economic Shifts &The Capex Driver
&Sales Growth • Depreciation &Capex • Leasing &
Capex • Capital Budgeting & • Capex &Growth
PART THREE: Cash Flow & Business Management..................161
Chapter 12: The Mechanics of Cash-Driver Shaping & Projections...163
Shaping the Cash Drivers• Projecting Future Cash Flows•
Putting It All Together
Chapter 13: Cash Drivers & Strategic Thinking.....................185
Cash-Driver Harmony • Cash Drivers &Competitive Advantage
• Cash Drivers &Export Potential
Chapter 14: Risk, Return & Valuing Cash Flows....................195
Debt &Equity Values • The Market’s Move to Using Cash Flow
to Evaluate a Business • Summarizing the Basic Steps of the
Mechanics of the Valuation Process
Chapter 15: What’s Next...........................................207
Index ............................................................209
Introduction
C ASH FLOW IS THE RODNEY DANGERFIELD OF BUSI-
ness management. It never gets the respect it
deserves—that is, until a business runs into trou-
ble paying its bills. Cash is like the air that we
breath:It’s taken for granted, but desperately
missed when cut off. And like that other precious commodity,
water, we tend to overuse it when it’s plentiful, regretting our
profligacy only when the flow slows to a trickle.
The study of cash-flow management doesn’t get its due
these days for one simple reason: The U.S. economy has been
awfully good for an awfully long time. In most major business
sectors, sales have been growing strongly. Credit—both short-
term operating lines and long-term debt—is readily available.
And best of all, investors have been only too eager to throw ven-
ture equity at every half-baked idea that comes down the pike.
When business is booming like this, it’s no wonder that a lot
of managers and stockholders have become rather blasé about
cash flow. Boom times breed sloppy habits, such as overstaffing
and overspending on everything from marketing to adminis-
trative overhead. And, consistent with the old adage that you
never spend someone else’s money as carefully as you spend
your own, this overspending is especially flagrant at start-up
firms that are running entirely on outside capital.
To help combat these bad habits, I commend to you this
wonderfully wise and readable new guide to cash-flow man-
agement, by business consultant Bill McGuinness. It comes
along at just the right moment in the U.S. business cycle—just
in time to refresh the memories of a lot of older executives
who have lived through both good times and bad times, but
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