scarb eesbm6e ppt_12

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall

Managing Cash Flow

CHAPTER 12

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 2Ch. 12: Managing Cash Flow

The Importance of Cash

“Everything is about cash – raising it,

conserving it, collecting it.”

Guy Kawasaki

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:

59% of small business owners

experience problems with cash flow.

Their biggest cash flow concern is

the ability to pay bills on time.

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 6 - 4Ch. 6: Franchising and the

Entrepreneur

FIGURE 12.1 Small Business Owners’ Strategies for Improving Cash Flow

Source: American Express OPEN Small Business Monitor, 2008.


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.

Copyright © 2011 Pearson Education, Inc. Publishing as Prentice HallCh. 12: Managing Cash Flow

The Cash Flow Cycle

OrderGoods

Day 1

ReceiveGoods

15

PayInvoice

40

14 25

218

178

SellGoods*

DeliverGoods

221

3

CustomerPays**

SendInvoice

230

9

280

50

Cash Flow Cycle = 240 days

*Based on Average Inventory Turnover:

365 days2.05 times/year

**Based on Average Collection Period:

365 days7.31 times/year

= 178 days

12 - 6

FIGURE 12.2

= 50 days


Five Cash Management

Roles of an Entrepreneur

1. Cash Finder

2. Cash Planner

3. Cash Distributor

4. Cash Collector

5. Cash Conserver

12 - 7

In addition to text


Cash and Profits

Cash ≠ profits.

Profit is the difference between a

company’s total revenue and total

expenses.

Cash is the money that is free and

readily available to use.

Cash flow measure a company’s

liquidity and its ability to pay it bills.

12 - 8Ch. 12: Managing Cash Flow


Cash Flow

Cash

Accounts Payable

Decrease in Cash

Production/Cash Purchases

Inventory

Accounts Receivable

Cash Sales

Increase in Cash

Leakage

Leakage

12 - 9

FIGURE 12.3


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

Minimum Cash Balance




2. Forecast Sales

(continued)


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.

Forecast Sales(continued)


Prepare three sales forecasts:

Pessimistic

Optimistic

Most Likely

Forecast Sales


Sales Forecast for a Start-Up

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




2. Forecast Sales

3. Forecast Cash Receipts

(continued)


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.

Forecast Cash Receipts


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

Nu

mb

er

of

Mo

nth

s

De

lin

qu

en

tCollecting Delinquent

Accounts




2. Forecast Sales


4. Forecast Cash Disbursements

(continued)


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.

Forecast Cash Disbursements




2. Forecast Sales


4. Forecast Cash Disbursements

5. Estimate End-of-Month Cash

Balance

(continued)


Take Beginning Cash Balance ...

Add Cash Receipts ...

Subtract Cash Disbursements

Result is Cash Surplus

or Cash Shortage

(Repay or Borrow?)

Estimate

End-of-Month Balance


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

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


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.

Accounts Receivable


FIGURE 12.5 Cash Flow Concerns Source: Based on American Express Corporation, 2005.

12 - 29


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 Receivable

Beating the Cash Crisis


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 Payable



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

Day

Amount

0 10 30

$1,000$980

20 days

$20

R = I

P x T=

$20

$980 x 20/365= 37.25%

12 - 33

FIGURE 12.6


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 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.

Inventory



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



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

(continued)



Start selling gift cards

Switch to zero-based budgeting

Be on the lookout for employee theft

Keep your business plan current

Invest surplus cash

(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.

12 - 39Ch. 12: Managing Cash Flow


All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of

the publisher. Printed in the United States of America.

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