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Teaching cash flow
management
Cash is King
Greg MalkinDirector, Entrepreneur Institute216-831-2200 x7362 gmalkin@us.edu
Syllabus 3 week unit plan
Profit versus Cashflow
Profit = Revenues - Expenses
Cashflow = Deposits into and withdrawals from our bank account.
Profit versus Cashflow
Matching = match revenue & expenses in the same period to determine profit.
Timing = Cashflow does not necessarily match the recognition of revenue and expenses.
The Cash Management Process
Estimate receipts (cash inflows) Plan expenditures (cash
outflows) Limit spending to budget
(cash control) Compare budgeted to actual
cashflows (evaluation)
Events
Purchase $1,000 of product in September with net 30 credit
Pay for product from supplier in October
Gross margin is 50%
Pay monthly salaries of $200
Product sales Sept Oct Nov
Cash 250 500 250
Credit 250 500 250
Total sales 500 1000 500
Cash Management Example
Aug Sept Oct Nov DecCash Flow
Starting 0 0 50 -400 150Cash in
Cash sales 250 500 250 0A/R 0 250 500 250Loan
Cash OutA/P 0 -1000 0 0Payroll -200 -200 -200 -200
Net cash Ending 50 -400 150 200
B/SCash 0 50 -400 150 200Inventory
Beg 0 0 750 250 0Purchase 1000 0 0 0End 750 250 0 0
A/R 250 500 250 0Total Assets 1050 350 400 200
LiabilitiesNote PayableA/P 1000 0 0 0
Equity 50 350 400 200
I/S Sept-DecRevenue 500 1000 500 2000COGS 250 500 250 1000Gross Profit 250 500 250 1000Expenses 200 200 200 800Net Profit 50 300 50 200
Homework Assignment
Case StudyCarrie Snowblower
Carrie’s Snowblowers (Q4 Income Statement)
$ 85,689Net income
3,3111% per month on ending balance
Interest payable
131,000Cash and noncashSG&A
Less:
220,000Gross margin
220,0002,200 units x $100Cost of Sales
$440,0002,200 units x $200Sales
Fourth Quarter Income Statement, Carrie Company
Will the company have to borrow money even though it is so profitable?
Carrie’s Snowblowers (Cash Receipts) 30% of all sales are for cash, 60% of receivables are collected in the month
following the sale, 35% are collected two months after the purchase, and the rest become bad debts. There are no accounts receivable outstanding at the beginning of October.
You will need to calculate the budgeted cashflows from sales for January, February and March.
+35% x (70% x $100,000) = $24,500
+ 60% x (70% x $300,000) = $126,000
= 30% x $100,000 = $30,000
Cash collections for January = $180,500
Cash collections for February = ______
+ 35% x (70% x $40,000 = $9,800
+ 60% x (70% x $100,000) = $42,000
= 30% x $300,000 = $90,000
Cash collections for December = $141,800
+ 35% of two month’s previous credit sales
+ 60% of previous month’s credit sales
= 30% of the current sales
Cash collections for the month.
Cash collections for March = ________
Carrie’s Snowblowers (Inventory purchases)
- (120% x current month’s sales
+ (120% x next month’s sales
- 200 units+ 1.2 x 500 units
= 200 unitsPurchases for October = 600 units
Purchases for December = ________Purchases for January = ___________
- 600 units+ 1,800 units= 500 unitsPurchases for November = 1,700 units
- Beginning Inventory
+ Ending inventory
Sales for the current month
Required purchases during the current month
Purchases for February = ___________Purchases for March = ___________
Carrie’s Snowblowers (Purchases payments)
February purchases= ____________
January purchases= ____________
+ .55 x 1,700 units x $100
= .45 x 300 units x $100
December purchases= $107,000
+ .55 x 600 units x $100
= .45 x 1,700 units x $100
November purchases= $109,500
+ $15,000 (given)= .45 x 600 units x $100
October purchases = $42,000
Cost of goods is $100 per unit. Inventories are bought on credit. 45% paid in the month of purchase and 55% paid in the following month. Accounts payable at the beginning of October were $15K.
Purchases = 45% x current month’ purchases + 55% x last month’s
Current month Last month
March purchases= ____________
Carrie’s Snowblowers (Q4 Cash Flow)
(128,900)
17,300 (90,200)
(16,000)
Excess (Deficit)
$369,500$144,500
$157,000
$68,000 Total cash requirements
$258,500$107,000
$109,500
$42,000 Purchases
86,000 32,500 27,500 26,000 SG&A (w/o interest)
25,000 5,000 20,000 Capital equipment
$ 20,000$ 20,000
$ 20,000
$20,000Ending Balance
$148,900$ 2,700$110,200
$36,000Borrowings (Repayments)
Less cash disbursements:
$240,600$161,800
$66,800$52,000 Total cash available
$200,600$141,800
$46,800$12,000 Sales and Receivables
Cash collections:
$ 40,000$ 20,000$20,000$40,000Beginning Cash Balance
4th Quarter
December
November
October
Cash Budget for Carrie Company — 4th Quarter
Carrie’s Snowblowers Quiz Name: ___________
Net income
1% per month on end of month loan balance
Interest payable
Cash and noncashSG&A
Less:
Gross margin
units x $100Cost of Sales
units x $200Sales
First Quarter Income Statement, Carrie Company
Assume interest is paid on the balance at the end of the month. (Example: if month ending loan balance is $8,500 then interest payment that month will be $85.
Carrie’s Snowblowers Quiz Name: ___________
Excess (Deficit)
Total cash requirements
Purchases
SG&A (w/o interest)
Capital equipment
Ending Balance
Borrowings (Repayments)
Less cash disbursements:
Total cash available
Sales and Receivables
Cash collections:
$20,000Beginning Cash Balance
1th Quarter
MarchFebruaryJanuary
Cash Budget for Carrie Company — 1th Quarter
Balance Sheet 6/30/86 - Q1 9/30/86 - Q2 12/31/86 - Q3 3/31/87 - Q4 Current Assets
Cash $ 100,000.00
$ 100,000.00
$ 100,000.00
$ 100,000
Receivables $ 507,000.00
$ 4,580,000.00
$ 4,739,000.00
$ 1,741,000
Inventories $ 2,808,000.00
$ 1,690,000.00
$ 1,166,000.00
$ 1,869,000
Prepaid Expenses $ 241,000.00
$ 294,000.00
$ 198,000.00
$ 283,000
Total current assets $ 3,656,000.00
$ 6,664,000.00
$ 6,203,000.00
$ 3,993,000
Fixed Assets $ 3,570,000.00
$ 3,808,000.00
$ 3,987,000.00
$ 4,288,000
Less Accumulated Depreciation $ 1,398,000.00
$ 1,564,000.00
$ 1,743,000.00
$ 1,938,000
Net fixed assets $ 2,172,000.00
$ 2,244,000.00
$ 2,244,000.00
$ 2,350,000
Other Assets $ 201,000.00
$ 247,000.00
$ 283,000.00
$ 302,000
Total Assets $ 6,029,000.00
$ 9,155,000.00
$ 8,730,000.00
$ 6,645,000
LiabilitiesAccounts Payable
$ 1,849,000.00
$ 1,717,000.00
$ 1,755,000.00
$ 1,664,000
Notes Payable - bank $ 2,176,000.00
$ 3,727,000.00
$ 3,041,000.00
$ 1,650,000
Income tax payable $ -
Current installment - long-term debt $ 980,000.00
$ 1,060,000.00
$ 207,000.00
$ 189,000
Total current liability $ 5,005,000.00
$ 6,504,000.00
$ 5,003,000.00
$ 3,503,000
Long Term Debt Term Loan
Total Liability $ 5,005,000.00
$ 6,504,000.00
$ 5,003,000.00
$ 3,503,000
Stockholder's EquityCommon Stock
$ 1,249,000.00
$ 1,249,000.00
$ 1,249,000.00
$ 1,249,000
Additional capital $ 105,000.00
$ 105,000.00
$ 105,000.00
$ 105,000
Retained Earnings $ (330,000.00)
$ 1,297,000.00
$ 2,373,000.00
$ 1,788,000
Total stockholder's Equity
$ 1,024,000.00
$ 2,651,000.00
$ 3,727,000.00
$ 3,142,000
6/30/86 - Q1 9/30/86 - Q2 12/31/86 - Q3 3/31/87 - Q4 Year
end
Cash Flow Analysis
Starting Cash Balance At least $100,000 156,000
100,000
100,000
100,000
Cash In Receipts 1,487,000
1,764,000
4,572,000
3,800,000
Cash Out Operating Expenses 1,928,000
2,967,000
2,698,000
2,022,000
Interest 67,000
110,000
168,000
86,000
Capital expenditures 177,000
238,000
179,000
301,000
Total cash out 2,172,000
3,315,000
3,886,000
2,409,000
Net cash available (529,000)
(1,451,000)
786,000
1,491,000
End of month minimum cash balance
100,000
100,000
100,000
100,000
Loan required to reach minimum cash balance
(629,000)
(1,551,000)
686,000
1,391,000
Cash available to payoff loan balance
Loan balanceStarting balance = $1,547,000
(2,176,000)
(3,727,000)
(3,041,000)
(1,650,000)
Collateral 80% of receivables 406,000
3,664,000
3,791,000
1,393,000
70% of Inventory 1,966,000
1,183,000
816,000
1,308,000
Total collateral 2,372,000
4,847,000
4,607,000
2,701,000
Answer Section
Sales Budget June July AugustUnits FORMULA1 0 0
Dollars FORMULA2 0 0
Unit Purchases Budget June July AugustDesired ending inventory FORMULA3 0 0 Current month's unit sales FORMULA4 0 0 Total units needed FORMULA5 0 0 Beginning inventory FORMULA6 0 0 Purchases (units) FORMULA7 0 0
Purchases (dollars) FORMULA8 $0 $0
Cash Budget June July AugustCash balance, beginning $8,000 $0 $0 Cash receipts: Collections from customers: From April sales FORMULA9 From May sales FORMULA10 FORMULA11 From June sales FORMULA12 0 0 From July sales 0 0 From August sales 0 Total cash available $0 $0 $0 Cash disbursements: Merchandise FORMULA13 $0 $0 Variable expenses FORMULA14 0 0 Fixed expenses FORMULA15 0 0 Interest paid 0 0 0 Total disbursements $0 $0 $0 Cash balance before financing $0 $0 $0 Less: Desired ending balance 0 0 0 Excess (deficit) of cash over needs $0 $0 $0 Financing Borrowing $0 $0 $0 Repayment 0 0 0 Total effects of financing $0 $0 $0 Cash balance, ending $0 $0 $0
Forecasted Income StatementFor Quarter Ended August 31, 2001
Sales FORMULA16Cost of goods sold FORMULA17Gross profit FORMULA18Expenses: Variable expenses FORMULA19 Fixed expenses FORMULA20 Depreciation expense FORMULA21 Interest expense FORMULA22 Total expenses $0Net income $0
Forecasted Balance SheetAugust 31, 2001
Assets: Cash FORMULA23 Accounts receivable FORMULA24 Merchandise inventory FORMULA25 Fixed assets (net) FORMULA26Total assets $0
Liabilities & equity: Accounts payable FORMULA27 Loans payable 0 Owner's equity FORMULA28Total liabilities & equity $0
Final Assessment
ResourcesHanson Ski Products - Harvard Case Study
Case: 9-187-038 Teaching notes: 5-191-031http://hbsp.harvard.edu/
Excel for Managerial AccountingGaylord SmithISBN:978-0324016246
Management Accounting A Road of DiscoveryJames Mackey & Michael ThomasISBN: 0-538-87189
Managerial AccountingBill LeeISBN: 0-538-43173-3
All curriculum materials except Harvard case studyConsortium Conference web site
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