Managing Cash Flow: 2011 Pearson Education, Inc. Publishing As Prentice Hall

CHAPTER
Managing Cash Flow
Copyright
2011 Pearson Education, Inc. Publishing as Prentice Hall
12
The Importance of Cash

Everything is about cash raising it,
conserving it, collecting it.
Guy Kawasaki
Common cause of business failure:
Cash crisis!
Ch. 12: Managing Cash Flow
Copyright
12 - 2
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.
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12 - 3
FIGURE 12.1
Small Business Owners Strategies for Improving Cash Flow

Source: American Express OPEN Small Business Monitor, 2008.
Ch. 6: Franchising and the

Entrepreneur
Copyright
6-4
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 companys

cash flow cycle.
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12 - 5
The Cash Flow Cycle
Order
Goods
Day 1
Receive
Goods
Sell
Goods*
Pay
Invoice
15
14
Deliver
Goods
40
Send
Invoice
Customer
Pays**
280
218 221 230
25
178
50
Cash Flow Cycle = 240 days

*Based
on Average Inventory Turnover:
365 days
2.05 times/year
= 178 days
**Based on Average Collection Period:
365 days
= 50 days
7.31 times/year
FIGURE 12.2
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12 - 6
Five Cash Management

Roles of an Entrepreneur
In addition to text
1. Cash Finder
2. Cash Planner
3. Cash Distributor
4. Cash Collector
5. Cash Conserver
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12 - 7
Cash and Profits
Cash profits.
Profit is the difference between a
companys total revenue and total
expenses.
Cash is the money that is free and
readily available to use.
Cash flow measure a companys
liquidity and its ability to pay it bills.
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Cash Flow
Increase in Cash
Cash
Leakage
Accounts Receivable
Decrease in Cash
Accounts Payable
Cash Sales
Production/Cash Purchases
Inventory
Leakage
FIGURE 12.3
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12 - 9
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 companys cash

receipts and cash disbursements and the
resulting cash balance.
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Preparing a Cash Budget

1. Determine a Minimum Cash Balance
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12 - 11
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!
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12 - 12

(continued)
2. Forecast Sales
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12 - 13
Forecast Sales
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.
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12 - 14
Forecast Sales
(continued)
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.
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12 - 15
Forecast Sales
Prepare three sales forecasts:
Pessimistic
Optimistic
Most Likely
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12 - 16
Sales Forecast for a Start-Up

Example:
Number of cars in trading zone
x Percent of imports
= Number of imported cars in trading zone
84,000
x 24%
20,160
Number of imports in trading zone

x Average expenditure on repairs
= Total import repair sales potential
20,160
x $485
$9,777,600
Total import repair sales potential

x Estimated market share
= Sales estimate
$9,777,600
x 9.9%
$967,982
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12 - 17

(continued)
2. Forecast Sales
3. Forecast Cash Receipts
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12 - 18
Forecast Cash Receipts
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.
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12 - 19
Collecting Delinquent
Accounts
Number of Months
Delinquent
93.80%
85.20%
73.60%
57.80%
42.80%
12
24
0.0%
23.60%
13.60%
20.0%
40.0%
60.0%
80.0%
100.0%
Probability of Collection
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12 - 20

(continued)
2. Forecast Sales
4. Forecast Cash Disbursements
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12 - 21
Forecast Cash Disbursements
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 Murphys Law.
Dont know where to begin? Try making a
daily list of the items that generate cash
and those that consume it.
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12 - 22

(continued)
2. Forecast Sales
4. Forecast Cash Disbursements

5. Estimate End-of-Month Cash
Balance
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12 - 23
Estimate
End-of-Month Balance
Take Beginning Cash Balance ...
Add Cash Receipts ...
Subtract Cash Disbursements
Result is Cash Surplus

or Cash Shortage
(Repay or Borrow?)
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12 - 24
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
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Benefits of Cash Management

(continued)
Develop a sound borrowing and

repayment program
Impress lenders and investors
Provide funds for expansion
Plan for investing surplus cash
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12 - 26
The Big Three

of Cash Management
1. Accounts Receivable
2. Accounts Payable
3. Inventory
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12 - 27
Accounts Receivable
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

companys cash as fast as you can.
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12 - 28
FIGURE 12.5
Cash Flow Concerns
Copyright
Source: Based on American Express Corporation, 2005.
12 - 29
Beating the Cash Crisis

Accounts Receivable
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!).
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12 - 30
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.
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Accounts Payable
Stretch out payment times as long as

possible without damaging your credit
rating.
Verify all invoices before paying them.
Take advantage of cash discounts.
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12 - 32
The Cost of Foregoing a Cash Discount

$1,000 invoice 2/10, net 30
$20
Amount
Day 0
$980
$1,000
10
30
20 days
R =
I
PxT
$20
$980 x 20/365
= 37.25%
FIGURE 12.6
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12 - 33

Accounts Payable
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.
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12 - 34

Inventory
Monitor it closely; inventory can drain a

companys 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.
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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
companys cash flow
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12 - 36

(continued)
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
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(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
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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.
Copyright
12 - 39
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.
Copyright
12 - 40

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CHAPTER

Managing Cash Flow

2011 Pearson Education, Inc. Publishing as Prentice Hall

The Importance of Cash

Ch. 12: Managing Cash Flow

2011 Pearson Education, Inc. Publishing as Prentice Hall

A business can be earning a profit and be

American Express OPEN Small Business

59% of small business owners

Their biggest cash flow concern is

Ch. 12: Managing Cash Flow

2011 Pearson Education, Inc. Publishing as Prentice Hall

Small Business Owners Strategies for Improving Cash Flow

Ch. 6: Franchising and the

2011 Pearson Education, Inc. Publishing as Prentice Hall

Cash management forecasting,

Young and growing companies

Know your companys

Ch. 12: Managing Cash Flow

2011 Pearson Education, Inc. Publishing as Prentice Hall

The Cash Flow Cycle

218 221 230

Cash Flow Cycle = 240 days

on Average Inventory Turnover:

**Based on Average Collection Period:

Ch. 12: Managing Cash Flow

2011 Pearson Education, Inc. Publishing as Prentice Hall

Five Cash Management

Ch. 12: Managing Cash Flow

2011 Pearson Education, Inc. Publishing as Prentice Hall

Cash and Profits

Ch. 12: Managing Cash Flow

2011 Pearson Education, Inc. Publishing as Prentice Hall

2011 Pearson Education, Inc. Publishing as Prentice Hall

The Cash Budget

A cash map that shows the amount and

Predicts the amount of cash a company will

Helps to visualize a companys cash

Ch. 12: Managing Cash Flow

2011 Pearson Education, Inc. Publishing as Prentice Hall

Preparing a Cash Budget

Ch. 12: Managing Cash Flow

2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch. 12: Managing Cash Flow

2011 Pearson Education, Inc. Publishing as Prentice Hall

Preparing a Cash Budget

1. Determine a Minimum Cash Balance

Ch. 12: Managing Cash Flow

2011 Pearson Education, Inc. Publishing as Prentice Hall

The heart of the cash budget.

Sales are ultimately transformed

Cash forecast is only as accurate

Ch. 12: Managing Cash Flow

2011 Pearson Education, Inc. Publishing as Prentice Hall

Lumpy or seasonal sales patterns

15% to 18% of wine and spirits shops

40% of toy sales take place

Ch. 12: Managing Cash Flow

2011 Pearson Education, Inc. Publishing as Prentice Hall

Ch. 12: Managing Cash Flow

2011 Pearson Education, Inc. Publishing as Prentice Hall

Sales Forecast for a Start-Up

Number of imports in trading zone