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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!
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 3Ch. 12: Managing Cash Flow
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.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 5Ch. 12: Managing Cash Flow
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
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice HallCh. 12: Managing Cash Flow
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
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall
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
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice HallCh. 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
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 10Ch. 12: Managing Cash Flow
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.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 11Ch. 12: Managing Cash Flow
Preparing a Cash Budget
1. Determine a Minimum Cash Balance
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 12Ch. 12: Managing Cash Flow
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
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 13Ch. 12: Managing Cash Flow
Preparing a Cash Budget
1. Determine a Minimum Cash Balance
2. Forecast Sales
(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 14Ch. 12: Managing Cash Flow
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
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 15Ch. 12: Managing Cash Flow
“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)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 16Ch. 12: Managing Cash Flow
Prepare three sales forecasts:
Pessimistic
Optimistic
Most Likely
Forecast Sales
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 17Ch. 12: Managing Cash Flow
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
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 18Ch. 12: Managing Cash Flow
Preparing a Cash Budget
1. Determine a Minimum Cash Balance
2. Forecast Sales
3. Forecast Cash Receipts
(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 19Ch. 12: Managing Cash Flow
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
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 20Ch. 12: Managing Cash Flow
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
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 21Ch. 12: Managing Cash Flow
Preparing a Cash Budget
1. Determine a Minimum Cash Balance
2. Forecast Sales
3. Forecast Cash Receipts
4. Forecast Cash Disbursements
(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 22Ch. 12: Managing Cash Flow
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
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 23Ch. 12: Managing Cash Flow
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
(continued)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 24Ch. 12: Managing Cash Flow
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
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 25Ch. 12: Managing Cash Flow
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
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 26Ch. 12: Managing Cash Flow
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)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 27Ch. 12: Managing Cash Flow
The “Big Three”
of Cash Management
1. Accounts Receivable
2. Accounts Payable
3. Inventory
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 28Ch. 12: Managing Cash Flow
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
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice HallCh. 12: Managing Cash Flow
FIGURE 12.5 Cash Flow Concerns Source: Based on American Express Corporation, 2005.
12 - 29
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 30Ch. 12: Managing Cash Flow
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
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 31Ch. 12: Managing Cash Flow
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.
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 32Ch. 12: Managing Cash Flow
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
Beating the Cash Crisis
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice HallCh. 12: Managing Cash Flow
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
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 34Ch. 12: Managing Cash Flow
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
Beating the Cash Crisis
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 35Ch. 12: Managing Cash Flow
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
Beating the Cash Crisis
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 36Ch. 12: Managing Cash Flow
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
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 37Ch. 12: Managing Cash Flow
Avoiding the Cash Crunch
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)
Copyright © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 38Ch. 12: Managing Cash Flow
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
(continued)
Copyright © 2011 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 © 2011 Pearson Education, Inc. Publishing as Prentice Hall 12 - 40Ch. 12: Managing Cash Flow
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