Copyright 2011 Pearson Education CHAPTER 12 Copyright 2011 Pearson Education Everything is about cash raising it, conserving it, collecting it. Guy Kawasaki Ch. 12: Managing Cash Flow Common cause of business failure: Common cause of business failure: Cash crisis! Copyright 2011 Pearson Education A business can be earning a profit and be forced to close because it runs out of cash! American Express OPEN Small Business Monitor study: 59% of small business owners experience problems with cash flow. Their biggest cash flow concern is the ability to pay bills on time. Ch. 12: Managing Cash Flow Copyright 2011 Pearson Education Ch. 6: Franchising and the Entrepreneur FIGURE 12.1 Small Business Owners Strategies for Improving Cash Flow Source: American Express OPEN Small Business Monitor, 2008. Copyright 2011 Pearson Education Cash management forecasting, collecting, disbursing, investing, and planning for the cash a company needs to operate smoothly. Young and growing companies are cash sponges. Know your companys cash flow cycle. Ch. 12: Managing Cash Flow Copyright 2011 Pearson Education Ch. 12: Managing Cash Flow The Cash Flow Cycle OrderGoods Day1 ReceiveGoods 15 PayInvoice SellGoods* DeliverGoods CustomerPays** SendInvoice Cash Flow Cycle = 240 days * Based on Average Inventory Turnover: 365 days 365 days 2.05 times/year 2.05 times/year **Based on Average Collection Period: 365 days 365 days 7.31 times/year 7.31 times/year = 178 days FIGURE 12.2 = 50 days Copyright 2011 Pearson Education 1.Cash Finder 2.Cash Planner 3.Cash Distributor 4.Cash Collector 5.Cash Conserver Ch. 12: Managing Cash Flow Copyright 2011 Pearson Education Cash profits. Profit is the difference between a companys total revenue and total expenses. Cash is the money that is free and readily available to use. Cash flow measure a companys liquidity and its ability to pay it bills. Ch. 12: Managing Cash Flow Copyright 2011 Pearson Education Ch. 12: Managing Cash Flow Cash Accounts Payable Decrease in Cash Production/Cash Purchases Inventory Accounts Receivable Cash Sales Increase in Cash Leakage Leakage FIGURE 12.3 Copyright 2011 Pearson Education A cash map that shows the amount and the timing of a firm's cash receipts and cash disbursements over time. Predicts the amount of cash a company will need to operate smoothly. Helps to visualize a companys cash receipts and cash disbursements and the resulting cash balance. Ch. 12: Managing Cash Flow Copyright 2011 Pearson Education Remember Goldilocks, the Three Bears, and the porridge: Not too much... Not too little... But a cash balance that's just right... for you! Ch. 12: Managing Cash Flow Determine a Minimum Cash Balance Copyright 2011 Pearson Education 1. Determine a Minimum Cash Balance 2. Forecast Sales Ch. 12: Managing Cash Flow (continued) Copyright 2011 Pearson Education The heart of the cash budget. Sales are ultimately transformed into cash receipts and cash disbursements. Cash forecast is only as accurate as the sales forecast from which it is derived. Ch. 12: Managing Cash Flow Copyright 2011 Pearson Education Lumpy or seasonal sales patterns are common. 15% to 18% of wine and spirits shops annual sales occur between December 15 and 31. 40% of toy sales take place in last 6 weeks of the year. Ch. 12: Managing Cash Flow (continued) Copyright 2011 Pearson Education Prepare three sales forecasts: Pessimistic Optimistic Most Likely Ch. 12: Managing Cash Flow Copyright 2011 Pearson Education Example: Number of cars in trading zone 84,000 x Percent of imports x 24% = Number of imported cars in trading zone 20,160 Number of imports in trading zone 20,160 x Average expenditure on repairs x $485 = Total import repair sales potential $9,777,600 Total import repair sales potential $9,777,600 x Estimated market share x 9.9% = Sales estimate $967,982 Ch. 12: Managing Cash Flow Copyright 2011 Pearson Education 1. Determine a Minimum Cash Balance 2. Forecast Sales 3. Forecast Cash Receipts Ch. 12: Managing Cash Flow (continued) Copyright 2011 Pearson Education Record all cash receipts when the cash is actually received (i.e. the cash method of accounting). Determine the collection pattern for credit sales; then add cash sales. Monitor closely: Slow and non-payers. Ch. 12: Managing Cash Flow Copyright 2011 Pearson Education Ch. 12: Managing Cash Flow Collecting Delinquent Accounts Copyright 2011 Pearson Education 1. Determine a Minimum Cash Balance 2. Forecast Sales 3. Forecast Cash Receipts 4. Forecast Cash Disbursements Ch. 12: Managing Cash Flow (continued) Copyright 2011 Pearson Education Record disbursements when you expect to make them. Start with those disbursements that are fixed amounts due on certain dates. Review the business checkbook to ensure accurate estimates. Add a cushion to the estimate to account for Murphys Law. Dont know where to begin? Try making a daily list of the items that generate cash and those that consume it. Ch. 12: Managing Cash Flow Copyright 2011 Pearson Education 1. Determine a Minimum Cash Balance 2. Forecast Sales 3. Forecast Cash Receipts 4. Forecast Cash Disbursements 5. Estimate End-of-Month Cash Balance Ch. 12: Managing Cash Flow (continued) Copyright 2011 Pearson Education Take Beginning Cash Balance... Add Cash Receipts... Subtract Cash Disbursements Result is Cash Surplus or Cash Shortage (Repay or Borrow?) Ch. 12: Managing Cash Flow Copyright 2011 Pearson Education Increase amount and speed of cash flowing into the company Reduce the amount and speed of cash flowing out Make the most efficient use of available cash Take advantage of money-saving opportunities such as cash discounts Finance seasonal business needs Ch. 12: Managing Cash Flow Copyright 2011 Pearson Education Develop a sound borrowing and repayment program Impress lenders and investors Provide funds for expansion Plan for investing surplus cash Ch. 12: Managing Cash Flow (continued) Copyright 2011 Pearson Education 1. Accounts Receivable 2. Accounts Payable 3. Inventory Ch. 12: Managing Cash Flow Copyright 2011 Pearson Education About 90% of industrial and wholesale sales are on credit, and 40% of retail sales are on account. Survey of small companies across a variety of industries found that 77% extend credit to their customers. Remember: A sale is not a sale until you collect the money. Accounts receivable goal: Collect your companys cash as fast as you can. Ch. 12: Managing Cash Flow Copyright 2011 Pearson Education Ch. 12: Managing Cash Flow FIGURE 12.5 Cash Flow Concerns Source: Based on American Express Corporation, Copyright 2011 Pearson Education Establish a firm credit-granting policy. Screen credit customers carefully. Develop a system of collecting accounts. Send invoices promptly. When an account becomes overdue, take action immediately. Add finance charges to overdue accounts (check the law first!). Ch. 12: Managing Cash Flow Accounts Receivable Copyright 2011 Pearson Education Ensure that invoices are accurate and timely. Include a description of the goods or services purchased. Ensure that invoices match purchase orders or contracts. Highlight the balance dues and due date. Include contact information in case customers have questions. Ch. 12: Managing Cash Flow Copyright 2011 Pearson Education Stretch out payment times as long as possible without damaging your credit rating. Verify all invoices before paying them. Take advantage of cash discounts. Ch. 12: Managing Cash Flow Accounts Payable Copyright 2011 Pearson Education Ch. 12: Managing Cash Flow Day Amount $1,000$ days $20 R = I P x T = $20 $980 x 20/365 = 37.25% FIGURE 12.6 Copyright 2011 Pearson Education Negotiate the best possible terms with your suppliers. Be honest with creditors; avoid the the check is in the mail syndrome. Schedule controllable cash disbursements to come due at different times. Use credit cards wisely. Ch. 12: Managing Cash Flow Accounts Payable Copyright 2011 Pearson Education Monitor it closely; inventory can drain a companys cash. Avoid inventory overbuying. It ties up valuable cash at a zero rate of return. Arrange for inventory deliveries at the latest possible date. Negotiate quantity discounts with suppliers when possible. Ch. 12: Managing Cash Flow Inventory Copyright 2011 Pearson Education Consider bartering, exchanging goods and services for other goods and services, to conserve cash. Trim overhead costs: Ask for discounts and freebies Periodically evaluate expenses Lease rather than buy Avoid nonessential cash outlays Negotiate fixed loan payments to coincide with your companys cash flow Ch. 12: Managing Cash Flow Copyright 2011 Pearson Education Trim overhead costs: Buy used equipment Hire part-time employees and freelancers Outsource nonessential activities Control employee advances and loans Establish an internal security and control system Develop a system to battle check fraud Change shipping terms Ch. 12: Managing Cash Flow (continued) Copyright 2011 Pearson Education Start selling gift cards Switch to zero-based budgeting Be on the lookout for employee theft Keep your business plan current Invest surplus cash Ch. 12: Managing Cash Flow (continued) Copyright 2011 Pearson Education Cash is King Cash and profits are not the same. Entrepreneurial success means operating a company lean and mean. Trim wasteful expenditures. Invest surplus funds. Plan and manage cash flow. Ch. 12: Managing Cash Flow