copyright © 2014 pearson education, inc. publishing as prentice hall ch. 12: managing cash flow 12...

Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall

The Importance of Cash

“Everything is about cash – raising it, conserving it, collecting it.”

Guy Kawasaki

12 - 2Ch. 12: Managing Cash Flow

Common cause of business failure:

Cash crisis!


Cash Management 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: ► 57% of small business owners

experience problems with cash flow.

► Their biggest cash flow concern is the ability to pay bills on time.



Small Business Owner’s Rating of Their Companies’ Cash Flow



Cash Management

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 company’s cash flow cycle.




The Cash Flow CycleThe Cash Flow Cycle

OrderGoods

Day 11

ReceiveGoods

1515

PayInvoice

4040

1414 2525

218218

178178

SellGoods*

DeliverGoods

221221

33

CustomerPays**

SendInvoice

230230

99

280280

5050

Cash Flow Cycle = 240 days

**Based on Average Inventory Turnover:

365 days 2.05 times/year

**Based on Average Collection Period:

365 days 7.31 times/year

= 178 days = 50 days


Five Cash Management Roles of an Entrepreneur

1. Cash Finder

2. Cash Planner

3. Cash Distributor

4. Cash Collector

5. Cash Conserver


In addition to text


Cash and Profits Cash ≠ profits.Cash ≠ profits. Profit is the difference between a Profit is the difference between a

company’s total revenue and total company’s total revenue and total expenses.expenses.

Cash is the money that is free and Cash is the money that is free and readily available to use.readily available to use.

Cash flow measure a company’s Cash flow measure a company’s liquidity and its ability to pay it bills.liquidity and its ability to pay it bills.



Cash Flow


Cash

Accounts Payable

Decrease in CashDecrease in Cash

Production/Cash Purchases

Inventory

Accounts Receivable

Cash Sales

Increase in CashIncrease in Cash

Leakage

Leakage


The Cash Budget

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 company’s cash receipts and cash disbursements and the resulting cash balance.



Preparing a Cash Budget

1. Determine a Minimum Cash Balance



Remember Goldilocks, the Three Bears, and the porridge:

►Not too much...►Not too little...►But a cash balance that's

just right ... for you!


Determine a Determine a Minimum Cash BalanceMinimum Cash Balance




2. Forecast Sales


(continued)


Forecast Sales

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.



Forecast Sales

“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.


(continued)


Forecast Sales

Prepare three sales forecasts:

Pessimistic

Optimistic

Most Likely



Sales Forecast for a Start-UpExample:

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





2. Forecast Sales

3. Forecast Cash Receipts


(continued)


Forecast Cash Receipts

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.


Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 12 - 20Ch. 12: Managing Cash Flow

Probability of Collecting Accounts Receivable




2. Forecast Sales


4. Forecast Cash Disbursements


(continued)


Forecast Cash Disbursements 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

“Murphy’s Law.” Don’t know where to begin? Try making a

daily list of the items that generate cash and those that consume it.



Cash Flow Concerns among Small Business Owners





2. Forecast Sales


4. Forecast Cash Disbursements

5. Estimate End-of-Month Cash Balance


(continued)


Estimate End-of-Month Balance

Take Beginning Cash Balance ... Add Cash Receipts ... Subtract Cash Disbursements Result is Cash Surplus

or Cash Shortage (Repay or Borrow?)



Benefits of Cash Management

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



Benefits of Cash Management

Develop a sound borrowing and repayment program

Develop a sound borrowing program Impress lenders and investors Provide funds for expansion Plan for investing surplus cash


(continued)


The “Big Three” of Cash Management

1. Accounts Receivable

2. Accounts Payable

3. Inventory



Accounts Receivable

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 company’s cash as fast as you can.



Beating the Cash Crisis

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!).


Accounts ReceivableAccounts Receivable


Accelerating Accounts Receivable

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.




Stretch out payment times as long as possible without damaging your credit rating.

Verify all invoices before paying them. Take advantage of cash discounts.


Accounts PayableAccounts Payable


The Cost of Foregoing a Cash Discount$1,000 invoice 2/10, net 30


DayDay

AmountAmount

00 1010 3030

$1,000$1,000$980$980

2020 daysdays

$20$20

R = R = IIP x TP x T

= $20$20$980 x 20/365$980 x 20/365

= 37.25%= 37.25%



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.


Accounts PayableAccounts Payable



Monitor it closely; inventory can drain a company’s 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.


InventoryInventory


Avoiding the Cash Crunch 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 company’s cash flow



Avoiding the Cash Crunch

Trim overhead costs:► Buy used equipment► Hire part-time employees and freelancers► Outsource nonessential activities► Establish an internal security and control system► Develop a system to battle check fraud► Change shipping terms► Use e-mail rather than mail► Use credit cards for small purchases


(continued)(continued)


Avoiding the Cash Crunch

Start selling gift cards Switch to zero-based budgeting Be on the lookout for employee theft Keep your business plan current Invest surplus cash Build a cash cushion


(continued)(continued)


Conclusion

“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.


copyright © 2014 pearson education, inc. publishing as prentice hall ch. 12: managing cash flow 12...

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