1. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall 15-1

2. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 15-2 Chapter 15

3. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Developing cash forecasts is essential for new businesses  A business can be earning a profit and be forced to close because it runs out of cash!  Managing cash effectively requires looking beyond the bottom line and focusing on what keeps a company going - cash 15-3

4. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Cash management: forecasting, collecting, disbursing, investing, and planning for the cash a company needs to operate smoothly  The SBA recommends that businesses have enough cash on hand to cover at least six months of operating expenses  But, many small businesses do not engage in cash planning  Study: 68% of small businesses perform no cash flow analysis at all! 15-4

5. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 15-5 Cash Flow Challenges

6. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  First step in managing cash more effectively:  Understanding a company’s cash flow cycle – the time lag between paying suppliers for merchandise and receiving payment from customers 15-6

7. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 15-7 The Cash Flow Cycle

8. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Five Cash Management Roles of the Entrepreneur 1.Cash Finder 2.Cash Planner 3.Cash Distributor 4.Cash Collector 5.Cash Conserver 15-8

9. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Profit: the difference between a company’s total revenue and its total expenses  Cash flow: measures a company’s liquidity and its ability to pay its bills and other financial obligations on time by tracking the flow of cash into and out of the business over a period of time. 15-9

10. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 15-10 Cash Flow

11. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Cash budget: a “cash map” showing 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  A helpful tool for visualizing the firm's cash receipts and cash disbursements and the resulting cash balance 15-11

12. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 1.Determine an adequate minimum cash balance 2.Forecast sales 3.Forecast cash receipts 4.Forecast cash disbursements 5.Estimate end-of-month cash balance 15-12

13. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Step 1: Determining an adequate minimum cash balance  The most reliable method of deciding cash balance is based on past experiences  What is considered an excessive cash balance for one company may be inadequate for another 15-13

14. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Step 2: Forecasting Sales  The heart of the cash budget  Sales are ultimately transformed into cash receipts and cash disbursements  “Lumpy” sales patterns are common  25% of sales at companies that supply exotic dancers for parties occur on Super Bowl Sunday  Super Bowl Sunday is the single largest revenue-generating day for pizzerias 15-14

15. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Step 2: Forecasting Sales  Create three estimates 1.Most Likely 2.Pessimistic 3.Optimistic 15-15

16. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Step 3: Forecasting Cash Receipts  Record all cash receipts when actually received (i.e., the cash method of accounting)  Determine the collection pattern for credit sales; then add cash sales  Electronic (Automated Clearing House, ACH) collections  Remote deposit 15-16

17. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 15-17 Probability of Collecting Accounts Receivable

18. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Step 4: Forecasting Cash Disbursements  Record cash disbursements when you will pay them, NOT when you incur the obligation to pay them  Start with those disbursements that are fixed amounts due on certain dates  Add a cushion 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 15-18

19. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. Step 5: Estimating the End-of-Month Cash Balance  Take Beginning Cash Balance...  Add Cash Receipts...  Subtract Cash Disbursements  Result Is Cash Surplus or Cash Shortage (Repay or Borrow?) 15-19

20. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  By planning cash needs ahead of time, a company can:  Increase amount and speed of cash flowing in  Reduce the amount and speed of cash flowing out  Develop a sound borrowing and repayment program  Impress lenders and investors  Reduce borrowing costs by borrowing only when necessary 15-20

21. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Take advantage of money-saving opportunities such as cash discounts  Make the most efficient use of available cash  Finance seasonal business needs  Provide funds for expansion  Plan for investing surplus cash 15-21

22. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Accounts Receivable  Accounts Payable  Inventory 15-22

23. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 15-23 The Cash Conversion Cycle

24. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Accounts Receivable  Selling on credit is common  But, “leakages” rob companies of 2% of their sales each year  Health care and Web service providers typically lose 5 -10% of their revenues each year  Remember: “A sale is not a sale until you collect the money”  The goal is to collect your company’s cash as fast as you can 15-24

25. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  How to establish a credit and collection policy  Screen credit customers carefully  Establish and communicate a firm written credit policy  Send invoices promptly  Cycle billing  When an account becomes overdue, take action immediately  Abide by Fair Debt Collection Practices Act 15-25

26. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Techniques for Accelerating Accounts Receivable  Ask customers to fax or e-mail orders  Send invoices when goods are shipped  Highlight the due date on invoices  Restrict customers’ credit until past-due bills are paid  Deposit checks and credit card receipts daily  Identify the top 20% of your customers and monitor them  Ask customers for up-front payments  Watch for signs that a customer may be about to declare bankruptcy  Consider using a lockbox service  Track the results of your company’s collection efforts 15-26

27. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Accounts Payable  Stretch out payment times as long as possible  But keep in mind that: 1.Developing good relationships with suppliers ensures they will provide good service 2.Having the goodwill of suppliers can make the call to let them know that you may be late with your payment this month a lot easier on both ends 3.Many suppliers offer or are willing to negotiate discounts for quick payment 15-27

28. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 4.When an entrepreneur strives to stretch out payables too long, there is a serious risk of damaging the company’s credit rating 5.Consider the ethical dimension; you expect prompt payment from your customers, so isn’t it right to pay your suppliers promptly as well 15-28

29. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 15-29 Apple Inc.’s Cash Conversion Cycle

30. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Verify all invoices before paying them  Take advantage of cash discounts (e.g., “2/10, net 30”)  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 15-30

31. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Inventory  Monitor inventory closely  It can drain a company's cash  Avoid inventory overbuying  It ties up valuable cash at a zero rate of return 15-31

32. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Mark down items that aren’t selling  Schedule inventory deliveries at the latest possible date  Negotiate quantity discounts with suppliers when possible  Consider suppliers that can make fast, frequent deliveries 15-32

33. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 15-33 Bootstrapping and the Breakeven Point

34. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Four basic rules for effective bootstrapping: 1.Overhead matters 2.Employee costs are the single biggest recurring cost 3.Reduce operating costs 4.Marketing matters, but know your customers and where they go for information 15-34

35. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Bootstrapping Overhead  Buy used or reconditioned equipment, especially if it is “behind the scenes” machinery  When practical, lease instead of buy  Avoid nonessential outlays  Negotiate fixed loan payments to coincide with your company’s cash flow  Do it yourself 15-35

36. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Bootstrapping Employee Costs  Hire part-time employees and freelancers  Outsource 15-36

37. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Bootstrapping Operating Costs  Use e-mail or faxes rather than mail  Look for simple ways to cut costs 15-37

38. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall.  Other Tools for Bootstrapping and Preserving Costs  Barter  Use credit cards to make small purchases  Establish an internal security and control system  Develop a system to battle check fraud  Change your shipping terms  Start selling gift cards  Invest surplus cash  Money market account  Zero surplus account (ZBA)  Sweep account  Be on the lookout for employee theft 15-38

39. Copyright © 2015 Pearson Education, Inc. publishing as Prentice Hall. 15-39