1. Copyright © 2011 Pearson Education CHAPTER 12

2. Copyright © 2011 Pearson Education “Everything is about cash – raising it, conserving it, collecting it.” Guy Kawasaki Ch. 12: Managing Cash Flow 12 - 2 Common cause of business failure: Common cause of business failure: Cash crisis!

3. Copyright © 2011 Pearson Education  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. Ch. 12: Managing Cash Flow 12 - 3

4. Copyright © 2011 Pearson Education Ch. 6: Franchising and the Entrepreneur 6 - 4 FIGURE 12.1 Small Business Owners’ Strategies for Improving Cash Flow Source: American Express OPEN Small Business Monitor, 2008.

5. Copyright © 2011 Pearson Education  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. Ch. 12: Managing Cash Flow 12 - 5

6. Copyright © 2011 Pearson Education 12 - 6 Ch. 12: Managing Cash Flow 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 365 days 2.05 times/year 2.05 times/year **Based on Average Collection Period: 365 days 365 days 7.31 times/year 7.31 times/year = 178 days FIGURE 12.2 = 50 days

7. Copyright © 2011 Pearson Education 1.Cash Finder 2.Cash Planner 3.Cash Distributor 4.Cash Collector 5.Cash Conserver 12 - 7 Ch. 12: Managing Cash Flow

8. Copyright © 2011 Pearson Education  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. Ch. 12: Managing Cash Flow 12 - 8

9. Copyright © 2011 Pearson Education Ch. 12: Managing Cash Flow 12 - 9 Cash Accounts Payable Decrease in Cash Production/Cash Purchases Inventory Accounts Receivable Cash Sales Increase in Cash Leakage Leakage FIGURE 12.3

10. Copyright © 2011 Pearson Education  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. Ch. 12: Managing Cash Flow 12 - 10

11. Copyright © 2011 Pearson Education Remember Goldilocks, the Three Bears, and the porridge: ◦ Not too much... ◦ Not too little... ◦ But a cash balance that's just right... for you! Ch. 12: Managing Cash Flow 12 - 11 Determine a Minimum Cash Balance

12. Copyright © 2011 Pearson Education 1. Determine a Minimum Cash Balance 2. Forecast Sales Ch. 12: Managing Cash Flow 12 - 12 (continued)

13. Copyright © 2011 Pearson Education  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. Ch. 12: Managing Cash Flow 12 - 13

14. Copyright © 2011 Pearson Education “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. Ch. 12: Managing Cash Flow 12 - 14 (continued)

15. Copyright © 2011 Pearson Education Prepare three sales forecasts:  Pessimistic  Optimistic  Most Likely Ch. 12: Managing Cash Flow 12 - 15

16. Copyright © 2011 Pearson Education 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 Ch. 12: Managing Cash Flow 12 - 16

17. Copyright © 2011 Pearson Education 1. Determine a Minimum Cash Balance 2. Forecast Sales 3. Forecast Cash Receipts Ch. 12: Managing Cash Flow 12 - 17 (continued)

18. Copyright © 2011 Pearson Education  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. Ch. 12: Managing Cash Flow 12 - 18

19. Copyright © 2011 Pearson Education Ch. 12: Managing Cash Flow 12 - 19 Collecting Delinquent Accounts

20. Copyright © 2011 Pearson Education 1. Determine a Minimum Cash Balance 2. Forecast Sales 3. Forecast Cash Receipts 4. Forecast Cash Disbursements Ch. 12: Managing Cash Flow 12 - 20 (continued)

21. Copyright © 2011 Pearson Education  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. Ch. 12: Managing Cash Flow 12 - 21

22. Copyright © 2011 Pearson Education 1. Determine a Minimum Cash Balance 2. Forecast Sales 3. Forecast Cash Receipts 4. Forecast Cash Disbursements 5. Estimate End-of-Month Cash Balance Ch. 12: Managing Cash Flow 12 - 22 (continued)

23. Copyright © 2011 Pearson Education  Take Beginning Cash Balance...  Add Cash Receipts...  Subtract Cash Disbursements  Result is Cash Surplus or Cash Shortage (Repay or Borrow?) Ch. 12: Managing Cash Flow 12 - 23

24. Copyright © 2011 Pearson Education  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 Ch. 12: Managing Cash Flow 12 - 24

25. Copyright © 2011 Pearson Education  Develop a sound borrowing and repayment program  Impress lenders and investors  Provide funds for expansion  Plan for investing surplus cash Ch. 12: Managing Cash Flow 12 - 25 (continued)

26. Copyright © 2011 Pearson Education 1. Accounts Receivable 2. Accounts Payable 3. Inventory Ch. 12: Managing Cash Flow 12 - 26

27. Copyright © 2011 Pearson Education  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. Ch. 12: Managing Cash Flow 12 - 27

28. Copyright © 2011 Pearson Education Ch. 12: Managing Cash Flow FIGURE 12.5 Cash Flow Concerns Source: Based on American Express Corporation, 2005. 12 - 28

29. Copyright © 2011 Pearson Education  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!). Ch. 12: Managing Cash Flow 12 - 29 Accounts Receivable

30. Copyright © 2011 Pearson Education  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. Ch. 12: Managing Cash Flow 12 - 30

31. Copyright © 2011 Pearson Education  Stretch out payment times as long as possible without damaging your credit rating.  Verify all invoices before paying them.  Take advantage of cash discounts. Ch. 12: Managing Cash Flow 12 - 31 Accounts Payable

32. Copyright © 2011 Pearson Education Ch. 12: Managing Cash Flow 12 - 32 Day Amount 0 10 30 $1,000$980 20 days $20 R = I P x T = $20 $980 x 20/365 = 37.25% FIGURE 12.6

33. Copyright © 2011 Pearson Education  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. Ch. 12: Managing Cash Flow 12 - 33 Accounts Payable

34. Copyright © 2011 Pearson Education  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. Ch. 12: Managing Cash Flow 12 - 34 Inventory

35. Copyright © 2011 Pearson Education  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 Ch. 12: Managing Cash Flow 12 - 35

36. Copyright © 2011 Pearson Education  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 Ch. 12: Managing Cash Flow 12 - 36 (continued)

37. Copyright © 2011 Pearson Education  Start selling gift cards  Switch to zero-based budgeting  Be on the lookout for employee theft  Keep your business plan current  Invest surplus cash Ch. 12: Managing Cash Flow 12 - 37 (continued)

38. Copyright © 2011 Pearson Education  “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. Ch. 12: Managing Cash Flow 12 - 38