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Copyright © 2014 Pearson Education, Inc. Publishing as Prentice HallCh. 12: Managing Cash Flow 12 - 1
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!
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
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.
12 - 3Ch. 12: Managing Cash Flow
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Small Business Owner’s Rating of Their Companies’ Cash Flow
12 - 4Ch. 12: Managing Cash Flow
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
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.
12 - 5Ch. 12: Managing Cash Flow
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
12 - 6Ch. 12: Managing Cash Flow
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
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Five Cash Management Roles of an Entrepreneur
1. Cash Finder
2. Cash Planner
3. Cash Distributor
4. Cash Collector
5. Cash Conserver
12 - 7Ch. 12: Managing Cash Flow
In addition to text
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
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.
12 - 8Ch. 12: Managing Cash Flow
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Cash Flow
12 - 9Ch. 12: Managing 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
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
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.
12 - 10Ch. 12: Managing Cash Flow
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Preparing a Cash Budget
1. Determine a Minimum Cash Balance
12 - 11Ch. 12: Managing Cash Flow
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Remember Goldilocks, the Three Bears, and the porridge:
►Not too much...►Not too little...►But a cash balance that's
just right ... for you!
12 - 12Ch. 12: Managing Cash Flow
Determine a Determine a Minimum Cash BalanceMinimum Cash Balance
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Preparing a Cash Budget
1. Determine a Minimum Cash Balance
2. Forecast Sales
12 - 13Ch. 12: Managing Cash Flow
(continued)
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
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.
12 - 14Ch. 12: Managing Cash Flow
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
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.
12 - 15Ch. 12: Managing Cash Flow
(continued)
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Forecast Sales
Prepare three sales forecasts:
Pessimistic
Optimistic
Most Likely
12 - 16Ch. 12: Managing Cash Flow
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
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
12 - 17Ch. 12: Managing Cash Flow
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Preparing a Cash Budget
1. Determine a Minimum Cash Balance
2. Forecast Sales
3. Forecast Cash Receipts
12 - 18Ch. 12: Managing Cash Flow
(continued)
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
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.
12 - 19Ch. 12: Managing Cash Flow
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 12 - 20Ch. 12: Managing Cash Flow
Probability of Collecting Accounts Receivable
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Preparing a Cash Budget
1. Determine a Minimum Cash Balance
2. Forecast Sales
3. Forecast Cash Receipts
4. Forecast Cash Disbursements
12 - 21Ch. 12: Managing Cash Flow
(continued)
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
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.
12 - 22Ch. 12: Managing Cash Flow
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Cash Flow Concerns among Small Business Owners
12 - 23Ch. 12: Managing Cash Flow
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Preparing a Cash Budget
1. Determine a Minimum Cash Balance
2. Forecast Sales
3. Forecast Cash Receipts
4. Forecast Cash Disbursements
5. Estimate End-of-Month Cash Balance
12 - 24Ch. 12: Managing Cash Flow
(continued)
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
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?)
12 - 25Ch. 12: Managing Cash Flow
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
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
12 - 26Ch. 12: Managing Cash Flow
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
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
12 - 27Ch. 12: Managing Cash Flow
(continued)
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
The “Big Three” of Cash Management
1. Accounts Receivable
2. Accounts Payable
3. Inventory
12 - 28Ch. 12: Managing Cash Flow
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
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.
12 - 29Ch. 12: Managing Cash Flow
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
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!).
12 - 30Ch. 12: Managing Cash Flow
Accounts ReceivableAccounts Receivable
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
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.
12 - 31Ch. 12: Managing Cash Flow
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Beating the Cash Crisis
Stretch out payment times as long as possible without damaging your credit rating.
Verify all invoices before paying them. Take advantage of cash discounts.
12 - 32Ch. 12: Managing Cash Flow
Accounts PayableAccounts Payable
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
The Cost of Foregoing a Cash Discount$1,000 invoice 2/10, net 30
12 - 33Ch. 12: Managing Cash Flow
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%
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Beating the Cash Crisis
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.
12 - 34Ch. 12: Managing Cash Flow
Accounts PayableAccounts Payable
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
Beating the Cash Crisis
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.
12 - 35Ch. 12: Managing Cash Flow
InventoryInventory
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
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
12 - 36Ch. 12: Managing Cash Flow
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
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
12 - 37Ch. 12: Managing Cash Flow
(continued)(continued)
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
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
12 - 38Ch. 12: Managing Cash Flow
(continued)(continued)
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall
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.
12 - 39Ch. 12: Managing Cash Flow
Copyright © 2014 Pearson Education, Inc. Publishing as Prentice Hall 12 - 40Ch. 12: Managing Cash Flow