1. Copyright © 2014 Pearson Education Ch. 12: Managing Cash Flow 12 - 1

2. Copyright © 2014 Pearson Education The Importance of Cash “Everything is about cash – raising it, conserving it, collecting it.” Guy Kawasaki 12 - 2 Ch. 12: Managing Cash Flow Common cause of business failure: Cash crisis!

3. Copyright © 2014 Pearson Education 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: ► 57% of small business owners experience problems with cash flow. ► Their biggest cash flow concern is the ability to pay bills on time. 12 - 3 Ch. 12: Managing Cash Flow

4. Copyright © 2014 Pearson Education Small Business Owner’s Rating of Their Companies’ Cash Flow 12 - 4 Ch. 12: Managing Cash Flow

5. Copyright © 2014 Pearson Education 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 company’s cash flow cycle. 12 - 5 Ch. 12: Managing Cash Flow

6. Copyright © 2014 Pearson Education 12 - 6 Ch. 12: Managing Cash Flow The Cash Flow Cycle Order Goods Day1 Receive Goods 15 Pay Invoice 40 1425 218 178 Sell Goods* Deliver Goods 221 3 Customer Pays** Send Invoice 230 9 280 50 Cash Flow Cycle = 240 days * * Based on Average Inventory Turnover: 365 days 2.05 times/year **Based on Average Collection Period: 365 days 7.31 times/year = 178 days= 50 days

7. Copyright © 2014 Pearson Education Five Cash Management Roles of an Entrepreneur 1.Cash Finder 2.Cash Planner 3.Cash Distributor 4.Cash Collector 5.Cash Conserver 12 - 7 Ch. 12: Managing Cash Flow In addition to text

8. Copyright © 2014 Pearson Education Cash and Profits Cash ≠ profits. Cash ≠ profits. Profit is the difference between a company’s total revenue and total expenses. 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 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. Cash flow measure a company’s liquidity and its ability to pay it bills. 12 - 8 Ch. 12: Managing Cash Flow

9. Copyright © 2014 Pearson Education Cash Flow 12 - 9 Ch. 12: Managing Cash Flow Cash Accounts Payable Decrease in Cash Production/Cash Purchases Inventory Accounts Receivable Cash Sales Increase in Cash Leakage

10. Copyright © 2014 Pearson Education 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 company’s cash receipts and cash disbursements and the resulting cash balance. 12 - 10 Ch. 12: Managing Cash Flow

11. Copyright © 2014 Pearson Education Preparing a Cash Budget 1. Determine a Minimum Cash Balance 12 - 11 Ch. 12: Managing Cash Flow

12. Copyright © 2014 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! 12 - 12 Ch. 12: Managing Cash Flow Determine a Minimum Cash Balance

13. Copyright © 2014 Pearson Education Preparing a Cash Budget 1. Determine a Minimum Cash Balance 2. Forecast Sales 12 - 13 Ch. 12: Managing Cash Flow (continued)

14. Copyright © 2014 Pearson Education 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. 12 - 14 Ch. 12: Managing Cash Flow

15. Copyright © 2014 Pearson Education Forecast Sales “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. 12 - 15 Ch. 12: Managing Cash Flow (continued)

16. Copyright © 2014 Pearson Education Forecast Sales Prepare three sales forecasts: Pessimistic Optimistic Most Likely 12 - 16 Ch. 12: Managing Cash Flow

17. Copyright © 2014 Pearson Education Sales Forecast for a Start-Up 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 12 - 17 Ch. 12: Managing Cash Flow

18. Copyright © 2014 Pearson Education Preparing a Cash Budget 1. Determine a Minimum Cash Balance 2. Forecast Sales 3. Forecast Cash Receipts 12 - 18 Ch. 12: Managing Cash Flow (continued)

19. Copyright © 2014 Pearson Education 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. 12 - 19 Ch. 12: Managing Cash Flow

20. 12 - 20 Copyright © 2014 Pearson Education Ch. 12: Managing Cash Flow Probability of Collecting Accounts Receivable

21. Copyright © 2014 Pearson Education Preparing a Cash Budget 1. Determine a Minimum Cash Balance 2. Forecast Sales 3. Forecast Cash Receipts 4. Forecast Cash Disbursements 12 - 21 Ch. 12: Managing Cash Flow (continued)

22. Copyright © 2014 Pearson Education 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 “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. 12 - 22 Ch. 12: Managing Cash Flow

23. Copyright © 2014 Pearson Education Cash Flow Concerns among Small Business Owners 12 - 23 Ch. 12: Managing Cash Flow

24. Copyright © 2014 Pearson Education Preparing a Cash Budget 1. Determine a Minimum Cash Balance 2. Forecast Sales 3. Forecast Cash Receipts 4. Forecast Cash Disbursements 5. Estimate End-of-Month Cash Balance 12 - 24 Ch. 12: Managing Cash Flow (continued)

25. Copyright © 2014 Pearson Education 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?) 12 - 25 Ch. 12: Managing Cash Flow

26. Copyright © 2014 Pearson Education 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 12 - 26 Ch. 12: Managing Cash Flow

27. Copyright © 2014 Pearson Education Benefits of Cash Management Develop a sound borrowing and repayment program Develop a sound borrowing program Impress lenders and investors Provide funds for expansion Plan for investing surplus cash 12 - 27 Ch. 12: Managing Cash Flow (continued)

28. Copyright © 2014 Pearson Education The “Big Three” of Cash Management 1. Accounts Receivable 2. Accounts Payable 3. Inventory 12 - 28 Ch. 12: Managing Cash Flow

29. Copyright © 2014 Pearson Education 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 company’s cash as fast as you can. 12 - 29 Ch. 12: Managing Cash Flow

30. Copyright © 2014 Pearson Education Beating the Cash Crisis 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!). 12 - 30 Ch. 12: Managing Cash Flow Accounts Receivable

31. Copyright © 2014 Pearson Education 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. 12 - 31 Ch. 12: Managing Cash Flow

32. Copyright © 2014 Pearson Education Beating the Cash Crisis Stretch out payment times as long as possible without damaging your credit rating. Verify all invoices before paying them. Take advantage of cash discounts. 12 - 32 Ch. 12: Managing Cash Flow Accounts Payable

33. Copyright © 2014 Pearson Education The Cost of Foregoing a Cash Discount $1,000 invoice 2/10, net 30 12 - 33 Ch. 12: Managing Cash Flow Day Amount 0 10 30 $1,000$980 20 days $20 R = I P x T = $20 $980 x 20/365 = 37.25%

34. Copyright © 2014 Pearson Education Beating the Cash Crisis 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. 12 - 34 Ch. 12: Managing Cash Flow Accounts Payable

35. Copyright © 2014 Pearson Education Beating the Cash Crisis 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. 12 - 35 Ch. 12: Managing Cash Flow Inventory

36. Copyright © 2014 Pearson Education 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 company’s cash flow 12 - 36 Ch. 12: Managing Cash Flow

37. Copyright © 2014 Pearson Education Avoiding the Cash Crunch Trim overhead costs: ► Buy used equipment ► Hire part-time employees and freelancers ► Outsource nonessential activities ► Establish an internal security and control system ► Develop a system to battle check fraud ► Change shipping terms ► Use e-mail rather than mail ► Use credit cards for small purchases 12 - 37 Ch. 12: Managing Cash Flow (continued)

38. Copyright © 2014 Pearson Education Avoiding the Cash Crunch Start selling gift cards Switch to zero-based budgeting Be on the lookout for employee theft Keep your business plan current Invest surplus cash Build a cash cushion 12 - 38 Ch. 12: Managing Cash Flow (continued)

39. Copyright © 2014 Pearson Education 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. 12 - 39 Ch. 12: Managing Cash Flow

40. Copyright © 2014 Pearson Education 12 - 40 Ch. 12: Managing Cash Flow