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


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.


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


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


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.


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


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!


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


Prepare three sales forecasts:Prepare three sales forecasts: Most LikelyMost Likely PessimisticPessimistic OptimisticOptimistic

Forecast SalesForecast Sales


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


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


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


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


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


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


The “Big The “Big Three” ofThree” of

Cash Cash ManagementManagement Accounts ReceivableAccounts Receivable

Accounts PayableAccounts Payable InventoryInventory


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


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


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


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


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


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%


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



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


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


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



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)



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)

copyright 2008 prentice hall publishing company 1 chapter 12: cash mgt managing cash flow

Documents

cash budget

cash sponges

cash crisis

cash map

cash flow slide

firms cash receipts

resulting cash balance

cash management roles