1. Chapter 8: Cash Flow1Copyright 1999 Prentice Hall Publishing Company Managing Cash Flow

2. Chapter 8: Cash Flow2Copyright 1999 Prentice Hall Publishing Company Why Manage Cash? l The most common reason small businesses fail is running out of cash. l Cash is the most important, yet least productive, asset a business owns. l Survey of business owners: “Biggest financial obstacle” was “uneven cash flow.”

3. Chapter 8: Cash Flow3Copyright 1999 Prentice Hall Publishing Company Cash  Profits l Remember: Cash and profits are not the same! l A company can earn a profit and still go out of business because it runs out of cash.

4. Chapter 8: Cash Flow4Copyright 1999 Prentice Hall Publishing Company Cash  Profits l Remember: Cash and profits are not the same! l A company can earn a profit and still go out of business because it runs out of cash. l Young, fast-growing companies are especially vulnerable.

5. The Cash Flow Cycle OrderGoods Day1 ReceiveGoods 15 PayInvoice 40 1425 218 178 SellGoods* DeliverGoods 221 3 CustomerPays** SendInvoice 230 9 280 50 Cash Flow Cycle = 240 days * Based on Average Inventory Turnover: 365 days = 178 days 365 days = 178 days 2.05 times/year 2.05 times/year ** Based on Average Collection Period: 365 days = 50 days 365 days = 50 days 7.31 times/year 7.31 times/year

6. Chapter 8: Cash Flow6Copyright 1999 Prentice Hall Publishing Company Entrepreneurs’ Five Cash Management Roles 1. Cash Finder - first and foremost responsibility. 2. Cash Planner - ensures efficient use of cash. 3. Cash Distributor - forecasts cash disbursements and pays bills on time. 4. Cash Collector - makes sure customers pay their bills on time. 5. Cash conserver - sees that company gets maximum value for every dollar spent.

7. Chapter 8: Cash Flow7Copyright 1999 Prentice Hall Publishing Company The Cash Budget l is a "cash map," showing the amount and the timing of a firm's cash receipts and cash disbursements over time. l predicts the amount of cash a company will need to operate smoothly. l is a helpful tool for visualizing the firm's cash receipts and cash disbursements and the resulting cash balance.

8. Chapter 8: Cash Flow8Copyright 1999 Prentice Hall Publishing Company Preparing a Cash Budget l Determine a Minimum Cash Balance l Forecast Sales l Forecast Cash Receipts l Forecast Cash Disbursements l Determine End-of-Month Cash Balance

9. Chapter 8: Cash Flow9Copyright 1999 Prentice Hall Publishing Company Remember Goldilocks, the Three Bears, and the porridge: l Not too much... l Not too little... l but a cash balance that's just right... for you! Determine a Minimum Cash Balance

10. Chapter 8: Cash Flow10Copyright 1999 Prentice Hall Publishing Company l The heart of the cash budget. l Sales are ultimately transformed into cash receipts and cash disbursements. l Prepare three sales forecasts: â Most Likely â Pessimistic â Optimistic Forecast Sales

11. Chapter 8: Cash Flow11Copyright 1999 Prentice Hall Publishing Company l Record all cash receipts when actually received (i.e. the cash method of accounting). l Determine the collection pattern for credit sales; then add cash sales. Forecast Cash Receipts

13. Chapter 8: Cash Flow13Copyright 1999 Prentice Hall Publishing Company l Start with those disbursements that are fixed amounts due on certain dates. l Review the business checkbook to ensure accurate estimates. l Add a cushion to the estimate to account for "Murphy's Law." l 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

14. Chapter 8: Cash Flow14Copyright 1999 Prentice Hall Publishing Company l Take Beginning Cash Balance... l Add Cash Receipts... l Subtract Cash Disbursements l Result is Cash Surplus or Cash Shortage (Repay or Borrow?) Determine End-of-Month Balance

15. Chapter 8: Cash Flow15Copyright 1999 Prentice Hall Publishing Company The "Big Three" of Cash Management l Accounts Receivable. l Accounts Payable. l Inventory.

16. Chapter 8: Cash Flow16Copyright 1999 Prentice Hall Publishing Company l About 90% of industrial and wholesale sales are on credit, and 40 percent of retail sales are on account. l Recent survey of small companies across a variety of industries found that 77% extend credit to their customers. l Remember: “A sale is not a sale until you collect the money.” l The goal with accounts receivable is to collect your company’s money as fast as you can. Accounts Receivable

17. Chapter 8: Cash Flow17Copyright 1999 Prentice Hall Publishing Company l Establish a firm credit-granting policy. l Screen credit customers carefully. l When an account becomes overdue, take action immediately. l Add finance charges to overdue accounts (check the law first!). l Develop a system of collecting accounts. l Send invoices promptly. Accounts Receivable Beating the Cash Crisis

18. Chapter 8: Cash Flow18Copyright 1999 Prentice Hall Publishing Company l Stretch out payment times as long as possible without damaging your credit rating. l Verify all invoices before paying them. l Take advantage of cash discounts. l Negotiate the best possible terms with your suppliers. Accounts Payable Beating the Cash Crisis

19. Chapter 8: Cash Flow19Copyright 1999 Prentice Hall Publishing Company l Be honest with creditors; avoid the "the check is in the mail" syndrome. l Schedule controllable cash disbursements to come due at different times. l Use credit cards wisely. Accounts Payable Beating the Cash Crisis

20. Chapter 8: Cash Flow20Copyright 1999 Prentice Hall Publishing Company l Monitor it closely; it can drain a company's cash. l Avoid inventory "overbuying." It ties up valuable cash at a zero rate of return. l Arrange for inventory deliveries at the latest possible date. l Negotiate quantity discounts with suppliers when possible. Inventory Beating the Cash Crisis

21. Chapter 8: Cash Flow21Copyright 1999 Prentice Hall Publishing Company Avoiding the Cash Crunch l Consider bartering, exchanging goods and services for other goods and services, to conserve cash. l Trim overhead costs. For example: â Lease rather than buy. â Avoid nonessential cash outlays. â Negotiate fixed loan payments to coincide with your company’s cash flow.

22. Chapter 8: Cash Flow22Copyright 1999 Prentice Hall Publishing Company Avoiding the Cash Crunch l Trim overhead costs. For example: â Buy used equipment â Develop an internal security system â Devise a method for fighting check fraud. l Change your shipping terms to “F.O.B. Seller.” l Switch to zero-based budgeting. l Keep your business plan current. l Invest surplus cash.

23. Chapter 8: Cash Flow23Copyright 1999 Prentice Hall Publishing Company Though my bottom line is black, I am flat upon my back; My cash flows out, and the customers pay slow. The growth of my receivables is almost unbelievable; The result is certain - unremitting woe! And I hear the banker utter that ominous low mutter, “Watch cash flow.” - Herbert S. Bailey