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SRT510 Business Case Studies
Business Cash Flow Cycle
Cash Flow Cycle
Inventory
Cash
Fixed Assets
AccountsReceivable
Buy
Make/Sell Sell on Credit
Collect CreditOwed
Buy/Make
SellForCash
“Other Stuff”
Company: Charlene’s Cakes
Charlene’s Cakes
Note: This example is typical, but VERY SIMPLIFIED (and very sad)
Charlene’s Cakes sells cakes to bakeries, catering companies, and wedding planners.
Customers are billed on receipt of cakes and have 15 days in which to pay.
Charlene’s Cakes—Cash OUT
Charlene’s Cakes owes $30K of a startup loan. Monthly loan payments to the bank are $1K
Cake supplies must be purchased Equipment & delivery vehicles must be
maintained/replaced as required 3 employees must be paid ($4.5K per month) Rent/gas/water/hydro of $2K per month
must be paid
Charlene’s Cakes—Cash IN
Cash sales and deposits Customers pay their tabs Money from loans
Date Event Cash In Cash Out
June 1 Startup Loan--$30K $30K
June 1 Rent + Utilities $2K
June 2 Purchased cake materials $5K
June 3 Purchased equipment plus used delivery vehicle
$25K
June 30 Cash sales + deposits for month
$4K
June 30 Sales made but not yet paid (accounts receivable): $10,000
June 30 Payroll $4.5K
June 30 Cash Balance End of month balance: $34K - $36.5K =(2.5K)
Date Event Cash In Cash Out
Starting cash balance ($2.5K)
July 1 Rent + Utilities $2K
July 1 Loan Payment $1K
July 3 Purchased cake materials $3K
July 31 Accounts Receivables “realized” this month (money owed by customers was paid)
$10K
July 31 Cash sales + deposits for month
$4K
July 31 Accounts receivable: $6K new sales
July 31 Payroll $4.5K
July 31 Cash Balance End of month balance: $11.5K – 10.5K = $1K
LATE
LATE
Date Event Cash In Cash Out
Starting cash balance $1K
Aug 1 Rent + Utilities $2K
Aug 1 Loan Payment $1K
Aug 3 Purchased cake materials $5K
Aug 20 Delivery Truck Repairs $4.5K
Aug 31 Accounts Receivables “realized” this month
$3K
Aug 30 Cash sales + deposits for month
$6K
Aug 31 Accounts receivable: $12K + $3K still outstanding = $15K***Bad news! Two customers declared bankruptcy -- $3K worth of sales will never be realized.This means new value of accounts receivable =$12K
Aug 31 Payroll $4.5K
Aug 31 Cash Balance End of month balance: $10K – $17K = ($7K)
LATE
LATE
Date Event Cash In Cash Out
Starting cash balance ($7K)
Sep 1 Rent + Utilities $2K
Sep 1 Loan Payment $1K
Sep 5 BANK says: “your payments were late the last 2 months, you missed a payment this month, your rent is in arrears, you are a new business in a shaky state; we are calling back our loan”.
Charlene’s Cakes says: “We don’t have the cash and no one will lend to us”
Bank says: “You are out of business. We will take your assets: your equipment and your truck ($25K-depreciation) and your accounts receivables ($12K).”
The landlord is probably out of luck.The employees are out of a job.
NOT MADE
NOT MADE
Concepts
Accounts Receivable (A/R)—money that customers owe you (sales made but not yet paid)
Accounts Payable (A/P)—money that you owe suppliers.
A/P Example
Your business purchases raw materials for $10K from company X. Payment terms are “pay within 60 days”.
Your A/P balance is $10K. If you pay the $10K your A/P balance will
be $0K until you buy something else from another supplier.
A/P
Even if your business has the cash to pay off it’s A/P, it may choose not to do so until the last minute so that it can use that money for other things.