Manage Your Cash Flow

Objectives Create a cash budget. Examine the role of credit. Improve your business’s cash flow.

Create a Cash Budget Construct a Cash Budget Should show a projection of your cash coming in and going out. Based on actual past revenue and operating expenses to ensure accuracy (if available)

Sample Cash Budget

Checkpoint>> Why is a cash budget important?

Examine the Role of Credit Types of Credit Trade credit- offered by one business to another (buy now – pay later) The negotiated price of products purchased on trade credit will be higher than the cash price (sometimes takes the place of interest)

Consumer credit- allows customers to take merchandise now and pay later Takes two major forms: loans credit cards

loan- gives a lump sum of money to spend and pay back over time with interest secured loan- backed by something of value that can be taken and sold if the loan is not repaid (collateral) installment loan- paid back in a certain number of payments (monthly increments)

Most credit cards fall into this category. unsecured loan- granted based on the credit history of the individual (excellent credit history) Most credit cards fall into this category. The credit card company reimburses the company for customer purchases The credit card company then charges the business a fee (1-3% of the amount charged)

Credit Procedures Terms- amount of credit, interest rate, length of time before payment is required Some items to consider when determining who is creditworthy: Previous credit history Employment record – consistent income Assets owned – along with money owed for assets Money available for making payments Financial references

Uncollectible Accounts Businesses and credit card companies usually charge the customer interest on the balance due to cover the cost of credit service. When customers are unable or unwilling to pay, this becomes a decrease in income for the business.

Checkpoint>> Why is credit offered?

Improve Your Cash Flow If cash receipts are not enough to cover expenses, you will have to improve your cash flow by: Offering discounts on bills paid right away (2/10 net 30) Establishing tighter credit policies- decrease the amount of time your customers can pay from 60 to 30 days (charging late fees)

Establishing a follow-up system for collecting unpaid accounts receivable- collection agency Holding shipments to customers with large unpaid bills Two businesses with the same level of sales and expenses could have very different cash flows.

Increase Your Capital Businesses can have cash flow problems if they start with too little capital. Obtain more capital by: Securing a loan Financing with personal funds Finding investors

Reduce Your Disbursements This can be done by: Gaining better control of inventory and payroll Slowing the rate at which bills are paid Reducing expenses

Control Inventory and Payroll Check to make sure the business is not holding too much inventory This reduces accounts payable Reduce the size of the workforce Layoffs or reduction in hours worked

Slow Bill Payment Some suppliers may agree to accept payment at a later date if interest charges are paid.

Cut Other Expenses Reduce variable expenses such as advertising to improve cash flow.

Checkpoint>> Why is it important to have adequate cash flow?

Assignment Thinking Critically #1-4