Download - Copyright 2008 Prentice Hall Publishing Company 1 Chapter 12: Cash Mgt Managing Cash Flow
1Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
ManagingCash FlowManagingCash Flow
2Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Cash ManagementCash Management
Common cause of business Common cause of business failure: Cash crisis!failure: Cash crisis!
A business can be earning a A business can be earning a profit and be forced to close profit and be forced to close because it runs out of cash! because it runs out of cash!
NFIB study: NFIB study: 67 percent of small business 67 percent of small business
owners have at least occasional owners have at least occasional problems managing cash flow.problems managing cash flow.
19 percent report cash flow as 19 percent report cash flow as a continuing problem.a continuing problem.
3Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Cash ManagementCash Management
Cash management – Cash management – forecasting, collecting, forecasting, collecting, disbursing, investing, and disbursing, investing, and planning for the cash a planning for the cash a company needs to operate company needs to operate smoothly. smoothly.
Young, growing companies are Young, growing companies are “cash sponges.”“cash sponges.”
Know your company’s cash Know your company’s cash flow cycle.flow cycle.
The Cash Flow CycleThe Cash Flow Cycle
OrderOrderGoodsGoods
Day 11
ReceiveReceiveGoodsGoods
1515
PayPayInvoiceInvoice
4040
1414 2525
218218
178178
SellSellGoods*Goods*
DeliverDeliverGoodsGoods
221221
33
CustomerCustomerPays**Pays**
SendSendInvoiceInvoice
230230
99
280280
5050
Cash Flow Cycle = 240 daysCash Flow Cycle = 240 days
* Based on Average Inventory Turnover:* Based on Average Inventory Turnover:
365 days 365 days = 178 days = 178 days 2.05 times/year2.05 times/year
** Based on Average Collection Period:** Based on Average Collection Period:
365 days 365 days = 50 days = 50 days 7.31 times/year7.31 times/year
5Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Five Cash Management Five Cash Management Roles of an EntrepreneurRoles of an Entrepreneur
Cash FinderCash Finder Cash PlannerCash Planner Cash DistributorCash Distributor Cash CollectorCash Collector Cash ConserverCash Conserver
Cash FlowCash Flow
Cash
Accounts Payable
Decrease in CashDecrease in Cash
Production/Cash Purchases
Inventory
Accounts Receivable
Cash Sales
Increase in CashIncrease in Cash
LeakageLeakage
LeakageLeakage
7Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
The Cash The Cash BudgetBudget
A “cash map,” showing the A “cash map,” showing the amount and the timing of a amount and the timing of a firm's cash receipts and firm's cash receipts and cash disbursements over cash disbursements over time.time.
Predicts the amount of cash Predicts the amount of cash a company will need to a company will need to operate smoothly.operate smoothly.
A helpful tool for visualizing A helpful tool for visualizing the firm's cash receipts and the firm's cash receipts and cash disbursements and the cash disbursements and the resulting cash balance.resulting cash balance.
8Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Preparing a Cash Preparing a Cash BudgetBudget
Determine a Minimum Determine a Minimum Cash BalanceCash Balance
Forecast SalesForecast Sales Forecast Cash ReceiptsForecast Cash Receipts Forecast Cash Forecast Cash
DisbursementsDisbursements Estimate End-of-Month Estimate End-of-Month
Cash BalanceCash Balance
9Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Remember Goldilocks, the Remember Goldilocks, the Three Bears, and the Three Bears, and the porridge: porridge:
Determine a Minimum Determine a Minimum Cash BalanceCash Balance
Not too much...Not too much... not too little...not too little... but a cash balance but a cash balance
that's just right ... for that's just right ... for you!you!
10Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
The The heartheart of the cash budget. of the cash budget. Sales are ultimately transformed into Sales are ultimately transformed into
cash receipts and cash disbursements.cash receipts and cash disbursements. Cash forecast is only as accurate as Cash forecast is only as accurate as
the sales forecast from which it is the sales forecast from which it is derived. derived.
““Lumpy” sales patterns are common.Lumpy” sales patterns are common. 15 percent to 18 percent of wine and 15 percent to 18 percent of wine and
spirits shops’ annual sales occur between spirits shops’ annual sales occur between December 15 and 31.December 15 and 31.
40 percent of toy sales take place in last 6 40 percent of toy sales take place in last 6 weeks of the year.weeks of the year.
Forecast SalesForecast Sales
11Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Prepare three sales forecasts:Prepare three sales forecasts: Most LikelyMost Likely PessimisticPessimistic OptimisticOptimistic
Forecast SalesForecast Sales
12Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Sales Forecast for a Sales Forecast for a Start-UpStart-Up
Example:Example:Number of cars in trading zoneNumber of cars in trading zone 84,000 84,000 x Percent of importsx Percent of imports x 24%x 24%= Number of imported cars in trading zone= Number of imported cars in trading zone
20,16020,160
Number of imports in trading zoneNumber of imports in trading zone 20,16020,160
x Average expenditure on repairsx Average expenditure on repairs x $485x $485= Total import repair sales potential= Total import repair sales potential
$9,777,600$9,777,600
Total import repair sales potentialTotal import repair sales potential $9,777,600$9,777,600
x Estimated market sharex Estimated market share x 9.9%x 9.9%= Sales estimate= Sales estimate $967,982$967,982
13.1%
15.4%
22.8%
29.7%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
Percent of Small Businesses
Weak sales
Unexpected variations in sales
Seasonal sales patterns
Difficulty collecting accountsreceivable
Causes of Cash Flow Problems in Small Businesses
14Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Record all cash receipts when Record all cash receipts when actually received actually received (i.e., the cash (i.e., the cash method of accounting).method of accounting).
Determine the collection Determine the collection pattern for credit sales; then pattern for credit sales; then add cash sales.add cash sales.
Monitor closely slow and Monitor closely slow and nonpayers.nonpayers.
Forecast Cash Forecast Cash ReceiptsReceipts
Collecting Delinquent Accounts
13.60%
23.60%
42.80%
57.80%
73.60%
85.20%
93.80%
0.0% 20.0% 40.0% 60.0% 80.0% 100.0%
24
12
9
6
3
2
1
Probability of Collection
16Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Record disbursements when you Record disbursements when you expect to make them. expect to make them.
Start with those disbursements that Start with those disbursements that are fixed amounts due on certain are fixed amounts due on certain dates.dates.
Review the business checkbook to Review the business checkbook to ensure accurate estimates.ensure accurate estimates.
Add a cushion to the estimate to Add a cushion to the estimate to account for “Murphy’s Law.”account for “Murphy’s Law.”
Don’t know where to begin? Try Don’t know where to begin? Try making a making a dailydaily list of the items that list of the items that generate cash and those that consume generate cash and those that consume it.it.
Forecast Cash Forecast Cash DisbursementsDisbursements
17Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Take Beginning Cash Balance...Take Beginning Cash Balance... Add Cash Receipts...Add Cash Receipts... Subtract Cash DisbursementsSubtract Cash Disbursements Result is Cash Surplus or Cash Result is Cash Surplus or Cash
Shortage (Repay or Borrow?)Shortage (Repay or Borrow?)
Estimate End-of-Estimate End-of-Month BalanceMonth Balance
18Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Benefits of Cash Benefits of Cash ManagementManagement
Increase amount and speed of cash Increase amount and speed of cash flowing into the companyflowing into the company
Reduce the amount and speed of cash Reduce the amount and speed of cash flowing outflowing out
Make the most efficient use of Make the most efficient use of available cashavailable cash
Take advantage of money-saving Take advantage of money-saving opportunities such as cash discountsopportunities such as cash discounts
Finance seasonal business needsFinance seasonal business needs
19Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Benefits of Cash Benefits of Cash ManagementManagement
Develop a sound borrowing and Develop a sound borrowing and repayment programrepayment program
Impress lenders and investorsImpress lenders and investors Reduce borrowing costs by borrowing Reduce borrowing costs by borrowing
only when necessaryonly when necessary Provide funds for expansionProvide funds for expansion Plan for investing surplus cashPlan for investing surplus cash
20Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
The “Big The “Big Three” ofThree” of
Cash Cash ManagementManagement Accounts ReceivableAccounts Receivable
Accounts PayableAccounts Payable InventoryInventory
21Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
About 90 percent of industrial and About 90 percent of industrial and wholesale sales are on credit, and 40 wholesale sales are on credit, and 40 percent of retail sales are on account.percent of retail sales are on account.
Survey of small companies across a Survey of small companies across a variety of industries found that 77 variety of industries found that 77 percent extend credit to their percent extend credit to their customers.customers.
Remember: “A sale is not a sale until Remember: “A sale is not a sale until you collect the money.”you collect the money.”
The goal with accounts receivable is to The goal with accounts receivable is to collect your company’s cash as fast as collect your company’s cash as fast as you can.you can.
Accounts Accounts ReceivableReceivable
35%
26%
22%
11%
6%
0%
5%
10%
15%
20%
25%
30%
35%
Collecting
accounts
receivable
Paying bills on
time
Having enough
cash to attract
new customers
Tracking cash
fl ow
Meeting payroll
Concern
Cash Flow Concerns
23Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Establish a firm credit-Establish a firm credit-granting policy.granting policy.
Screen credit customers Screen credit customers carefully.carefully.
When an account becomes When an account becomes overdue, take action overdue, take action immediatelyimmediately..
Add finance charges to overdue Add finance charges to overdue accounts (check the law first!).accounts (check the law first!).
Develop a system of collecting Develop a system of collecting accounts.accounts.
Send invoices promptly.Send invoices promptly.
Accounts ReceivableAccounts Receivable
Beating the Cash Beating the Cash CrisisCrisis
24Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Accelerating Accounts Accelerating Accounts ReceivableReceivable
Ask customers to fax or e-Ask customers to fax or e-mail ordersmail orders
Send invoices when goods Send invoices when goods are shippedare shipped
Highlight the due date on Highlight the due date on invoices invoices
Restrict customers’ credit Restrict customers’ credit until past-due bills are paiduntil past-due bills are paid
Deposit checks and credit Deposit checks and credit card receipts dailycard receipts daily
25Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Accelerating Accounts Accelerating Accounts ReceivableReceivable
Identify the top 20 percent of Identify the top 20 percent of your customers and monitor your customers and monitor them closelythem closely
Ask customers for up-front Ask customers for up-front paymentspayments
Watch for signs that a Watch for signs that a customer may be about to customer may be about to declare bankruptcydeclare bankruptcy
Consider using a lockbox Consider using a lockbox serviceservice
Track the results of your Track the results of your company’s collection effortscompany’s collection efforts
26Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Stretch out payment times as Stretch out payment times as long as possible long as possible without without damaging your credit ratingdamaging your credit rating..
Verify Verify allall invoices before invoices before paying them.paying them.
Take advantage of cash Take advantage of cash discounts.discounts.
Accounts PayableAccounts Payable
Beating the Cash Beating the Cash CrisisCrisis
The Cost of Forgoing a Cash DiscountThe Cost of Forgoing a Cash Discount$1,000 invoice 2/10, net 30$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 20/360$980 x 20/360
= = 36.7%36.7%
28Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Negotiate the best possible Negotiate the best possible terms with your suppliers.terms with your suppliers.
Be honest with creditors; avoid Be honest with creditors; avoid the “the check is in the mail” the “the check is in the mail” syndrome.syndrome.
Schedule controllable cash Schedule controllable cash disbursements to come due at disbursements to come due at different times.different times.
Use credit cards wisely.Use credit cards wisely.
Accounts PayableAccounts Payable
Beating the Cash Beating the Cash CrisisCrisis
29Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Monitor it closely; it can Monitor it closely; it can drain a company’s cash.drain a company’s cash.
Avoid inventory Avoid inventory “overbuying.” It ties up “overbuying.” It ties up valuable cash at a zero rate valuable cash at a zero rate of return.of return.
Arrange for inventory Arrange for inventory deliveries at the latest deliveries at the latest possible date.possible date.
Negotiate quantity Negotiate quantity discounts with suppliers discounts with suppliers when possible.when possible.
InventoryInventory
Beating the Cash Beating the Cash CrisisCrisis
28%
18% 18%
12%11%
4%
0%
5%
10%
15%
20%
25%
30%
Per
cen
tag
e o
f S
mal
l Bu
sin
ess
Usi
ng
Investing personalor private funds
Postponingpurchases
Obtaining a line ofcredit
Using a credit card Using a short-termloan
Leasing rather thanpurchasing
Tactic
Coping with a Cash CrunchTactics Used by Small Businesses
31Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Avoiding the Cash Avoiding the Cash CrunchCrunch
Consider bartering, exchanging Consider bartering, exchanging goods and services for other goods goods and services for other goods and services, to conserve cash.and services, to conserve cash.
Trim overhead costs. For example:Trim overhead costs. For example: Ask for discounts and “freebies” Ask for discounts and “freebies” Periodically evaluate expensesPeriodically evaluate expenses Lease rather than buyLease rather than buy Avoid nonessential cash outlaysAvoid nonessential cash outlays Negotiate fixed loan payments to Negotiate fixed loan payments to
coincide with your company’s cash flowcoincide with your company’s cash flow
32Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Avoiding the Cash Avoiding the Cash CrunchCrunch
Trim overhead costs. For example:Trim overhead costs. For example: Buy used equipmentBuy used equipment Hire part-time employees and freelancersHire part-time employees and freelancers Outsource nonessential activitiesOutsource nonessential activities Control employee advances and loansControl employee advances and loans Establish an internal security and control Establish an internal security and control
systemsystem Devise a method for fighting check fraudDevise a method for fighting check fraud Change shipping termsChange shipping terms Start selling gift cardsStart selling gift cards Switch to zero-based budgetingSwitch to zero-based budgeting
(Continued)(Continued)
33Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company
Avoiding the Cash Avoiding the Cash CrunchCrunch
Be on the lookout for employee Be on the lookout for employee thefttheft
Keep your business plan Keep your business plan currentcurrent
Invest surplus cashInvest surplus cash
(Continued)(Continued)