1. SRT510 Business Case Studies Business Cash Flow Cycle

2. Cash Flow Cycle Inventory Cash Fixed Assets Accounts Receivable Buy Make/Sell Sell on Credit Collect Credit Owed Buy/ Make Sell For Cash “Other Stuff”

3. Company: Charlene’s Cakes

4. Charlene’s Cakes Note: This example is typical, but VERY SIMPLIFIED (and very sad) Charlene’s Cakes sells cakes to bakeries, catering companies, and wedding planners. Customers are billed on receipt of cakes and have 15 days in which to pay.

5. Charlene’s Cakes—Cash OUT Charlene’s Cakes owes $30K of a startup loan. Monthly loan payments to the bank are $1K Cake supplies must be purchased Equipment & delivery vehicles must be maintained/replaced as required 3 employees must be paid ($4.5K per month) Rent/gas/water/hydro of $2K per month must be paid

6. Charlene’s Cakes—Cash IN Cash sales and deposits Customers pay their tabs Money from loans

7. DateEventCash InCash Out June 1Startup Loan--$30K$30K June 1Rent + Utilities$2K June 2Purchased cake materials$5K June 3Purchased equipment plus used delivery vehicle $25K June 30Cash sales + deposits for month $4K June 30Sales made but not yet paid (accounts receivable): $10,000 June 30Payroll$4.5K June 30Cash BalanceEnd of month balance: $34K - $36.5K =(2.5K)

8. DateEventCash InCash Out Starting cash balance($2.5K) July 1Rent + Utilities$2K July 1Loan Payment$1K July 3Purchased cake materials$3K July 31Accounts Receivables “realized” this month (money owed by customers was paid) $10K July 31Cash sales + deposits for month $4K July 31Accounts receivable: $6K new sales July 31Payroll$4.5K July 31Cash BalanceEnd of month balance: $11.5K – 10.5K = $1K LATE

9. DateEventCash InCash Out Starting cash balance$1K Aug 1Rent + Utilities$2K Aug 1Loan Payment$1K Aug 3Purchased cake materials$5K Aug 20Delivery Truck Repairs$4.5K Aug 31Accounts Receivables “realized” this month $3K Aug 30Cash sales + deposits for month $6K Aug 31Accounts receivable: $12K + $3K still outstanding = $15K ***Bad news! Two customers declared bankruptcy -- $3K worth of sales will never be realized. This means new value of accounts receivable =$12K Aug 31Payroll$4.5K Aug 31Cash BalanceEnd of month balance: $10K – $17K = ($7K) LATE

10. DateEventCash InCash Out Starting cash balance($7K) Sep 1Rent + Utilities$2K Sep 1Loan Payment$1K Sep 5BANK says: “your payments were late the last 2 months, you missed a payment this month, your rent is in arrears, you are a new business in a shaky state; we are calling back our loan”. Charlene’s Cakes says: “We don’t have the cash and no one will lend to us” Bank says: “You are out of business. We will take your assets: your equipment and your truck ($25K-depreciation) and your accounts receivables ($12K).” The landlord is probably out of luck. The employees are out of a job. NOT MADE

11. Concepts Accounts Receivable (A/R)—money that customers owe you (sales made but not yet paid) Accounts Payable (A/P)—money that you owe suppliers.

12. A/P Example Your business purchases raw materials for $10K from company X. Payment terms are “pay within 60 days”. Your A/P balance is $10K. If you pay the $10K your A/P balance will be $0K until you buy something else from another supplier.

13. A/P Even if your business has the cash to pay off it’s A/P, it may choose not to do so until the last minute so that it can use that money for other things.