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Teaching cash flow management Cash is King Greg Malkin Director, Entrepreneur Institute 216-831-2200 x7362

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Presentation on theme: "Teaching cash flow management Cash is King Greg Malkin Director, Entrepreneur Institute 216-831-2200 x7362"— Presentation transcript:

1 Teaching cash flow management Cash is King Greg Malkin Director, Entrepreneur Institute x7362

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3 Syllabus 3 week unit plan

4 Profit versus Cashflow Profit = Revenues - Expenses Cashflow = Deposits into and withdrawals from our bank account.

5 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.

6 The Cash Management Process Estimate receipts (cash inflows) Plan expenditures (cash outflows) Limit spending to budget (cash control) Compare budgeted to actual cashflows (evaluation)

7 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 salesSeptOctNov Cash Credit Total sales Cash Management Example

8 AugSeptOctNovDec Cash Flow Starting Cash in Cash sales A/R Loan Cash Out A/P Payroll-200 Net cashEnding B/S Cash Inventory Beg Purchase End A/R Total Assets Liabilities Note Payable A/P Equity I/SSept-Dec Revenue COGS Gross Profit Expenses Net Profit

9 Homework Assignment

10 Case Study Carrie Snowblower

11 Carries Snowblowers (Q4 Income Statement) $ 85,689Net income 3,3111% per month on ending balanceInterest 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?

12 Carries 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, % 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, % x (70% x $100,000) = $42,000 = 30% x $300,000 = $90,000 Cash collections for December = $141, % of two months previous credit sales + 60% of previous months credit sales = 30% of the current sales Cash collections for the month. Cash collections for March = ________

13 Carries Snowblowers (Inventory purchases) - (120% x current months sales + (120% x next months sales units+ 1.2 x 500 units = 200 unitsPurchases for October = 600 units Purchases for December = ________ Purchases for January = ___________ 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 = ___________

14 Carries Snowblowers (Purchases payments) February purchases = ____________ January purchases = ____________ +.55 x 1,700 units x $100=.45 x 300 units x $100 December purchases = $107, 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 months Current month Last month March purchases = ____________

15 Carries 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 Ending 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 $40,000Beginning Cash Balance 4 th QuarterDecemberNovemberOctober Cash Budget for Carrie Company 4 th Quarter

16 Carries 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.

17 Carries Snowblowers QuizName: ___________ 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 1 th QuarterMarchFebruaryJanuary Cash Budget for Carrie Company 1 th Quarter

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20 Balance Sheet 6/30/86 - Q1 9/30/86 - Q2 12/31/86 - Q3 3/31/87 - Q4 Current Assets Cash $ 100, $ 100,000 Receivables $ 507, $ 4,580, $ 4,739, $ 1,741,000 Inventories $ 2,808, $ 1,690, $ 1,166, $ 1,869,000 Prepaid Expenses $ 241, $ 294, $ 198, $ 283,000 Total current assets $ 3,656, $ 6,664, $ 6,203, $ 3,993,000 Fixed Assets $ 3,570, $ 3,808, $ 3,987, $ 4,288,000 Less Accumulated Depreciation $ 1,398, $ 1,564, $ 1,743, $ 1,938,000 Net fixed assets $ 2,172, $ 2,244, $ 2,350,000 Other Assets $ 201, $ 247, $ 283, $ 302,000 Total Assets $ 6,029, $ 9,155, $ 8,730, $ 6,645,000 Liabilities Accounts Payable $ 1,849, $ 1,717, $ 1,755, $ 1,664,000 Notes Payable - bank $ 2,176, $ 3,727, $ 3,041, $ 1,650,000 Income tax payable $ - Current installment - long-term debt $ 980, $ 1,060, $ 207, $ 189,000 Total current liability $ 5,005, $ 6,504, $ 5,003, $ 3,503,000 Long Term Debt Term Loan Total Liability $ 5,005, $ 6,504, $ 5,003, $ 3,503,000 Stockholder's Equity Common Stock $ 1,249, $ 1,249,000 Additional capital $ 105, $ 105,000 Retained Earnings $ (330,000.00) $ 1,297, $ 2,373, $ 1,788,000 Total stockholder's Equity $ 1,024, $ 2,651, $ 3,727, $ 3,142,000

21 6/30/86 - Q1 9/30/86 - Q2 12/31/86 - Q3 3/31/87 - Q4 Year end Cash Flow Analysis Starting Cash BalanceAt least $100, , ,000 Cash InReceipts 1,487,000 1,764,000 4,572,000 3,800,000 Cash OutOperating Expenses 1,928,000 2,967,000 2,698,000 2,022,000 Interest 67, , ,000 86,000 Capital expenditures 177, , , ,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 Loan required to reach minimum cash balance (629,000) (1,551,000) 686,000 1,391,000 Cash available to payoff loan balance Loan balance Starting 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 1,308,000 Total collateral 2,372,000 4,847,000 4,607,000 2,701,000

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23 Answer Section Sales BudgetJuneJulyAugust UnitsFORMULA100 DollarsFORMULA200 Unit Purchases BudgetJuneJulyAugust Desired ending inventoryFORMULA300 Current month's unit salesFORMULA400 Total units neededFORMULA500 Beginning inventoryFORMULA600 Purchases (units)FORMULA700 Purchases (dollars)FORMULA8$0 Cash BudgetJuneJulyAugust Cash balance, beginning$8,000$0 Cash receipts: Collections from customers: From April salesFORMULA9 From May salesFORMULA10FORMULA11 From June salesFORMULA1200 From July sales 00 From August sales 0 Total cash available$0 Cash disbursements: MerchandiseFORMULA13$0 Variable expensesFORMULA1400 Fixed expensesFORMULA1500 Interest paid000 Total disbursements$0 Cash balance before financing$0 Less: Desired ending balance000 Excess (deficit) of cash over needs$0 Financing Borrowing$0 Repayment000 Total effects of financing$0 Cash balance, ending$0

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25 Final Assessment

26 Resources Hanson Ski Products - Harvard Case Study Case: Teaching notes: Excel for Managerial Accounting Gaylord Smith ISBN: Management Accounting A Road of Discovery James Mackey & Michael Thomas ISBN: Managerial Accounting Bill Lee ISBN: All curriculum materials except Harvard case study Consortium Conference web site


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