Unformatted text preview: TR2201 Entrepreneurial Marketing
KWOK Ying Yao [email protected] CHAPTER 12 Managing Cash Flow 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: 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 FIGURE 12.1 Small Business Owners' Strategies for Improving Cash Flow
Source: American Express OPEN Small Business Monitor, 2008. Ch. 6: Franchising and the Entrepreneur 6-4 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 The Cash Flow Cycle
Order Goods Receive Goods Pay Invoice Sell Goods* Deliver Goods Send Invoice Customer Pays** Day 1 14 15 25 40 178 218 221 230 3 9 50 280 Cash Flow Cycle = 240 days
*Based on Average Inventory Turnover: **Based on Average Collection Period: 365 days 2.05 times/year = 178 days 365 days = 50 days 7.31 times/year
12 - 6 Ch. 12: Managing Cash Flow Cash and Profits
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 - 7 Increase in Cash Leakage
Accounts Receivable Cash Flow
Cash Decrease in Cash
Accounts Payable Cash Sales Production/Cash Purchases Inventory FIGURE 12.3
Ch. 12: Managing Cash Flow Leakage
12 - 8 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. Ch. 12: Managing Cash Flow 12 - 9 Preparing a Cash Budget
1. Determine a Minimum Cash Balance Ch. 12: Managing Cash Flow 12 - 10 Determine a Minimum Cash Balance
Different for each industry Different for each business (even in the same industry) Rough rule-of-thumb > one-fourth of current liabilities Based on past experience 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 Preparing a Cash Budget
1. Determine a Minimum Cash Balance 2. Forecast Sales Ch. 12: Managing Cash Flow 12 - 12 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. Ch. 12: Managing Cash Flow 12 - 13 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. in last 6 weeks of the year. 40% of toy sales take place Ch. 12: Managing Cash Flow 12 - 14 Forecast Sales
Prepare three sales forecasts: Pessimistic Optimistic Most Likely Ch. 12: Managing Cash Flow 12 - 15 Sales Forecast for a Start-Up
Example import car repair business:
Number of cars in trading zone x Percent of imports = Number of imported cars in trading zone Number of imports in trading zone x Average expenditure on repairs = Total import repair sales potential Total import repair sales potential x Estimated market share = Sales estimate
Ch. 12: Managing Cash Flow 84,000 x 24% 20,160 20,160 x $485 $9,777,600 $9,777,600 x 9.9% $967,982
12 - 16 Preparing a Cash Budget
1. Determine a Minimum Cash Balance 2. Forecast Sales 3. Forecast Cash Receipts Ch. 12: Managing Cash Flow 12 - 17 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. Ch. 12: Managing Cash Flow 12 - 18 Collecting Delinquent Accounts
1 2 3 6
t u q n i l e D 93.80% 85.20% 73.60% 57.80% 42.80% 23.60% 13.60% 9 12 24 s h t n M f o r e b m u N 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% Probability of Collection Ch. 12: Managing Cash Flow 12 - 19 Preparing a Cash Budget
1. Determine a Minimum Cash Balance 2. Forecast Sales 3. Forecast Cash Receipts 4. Forecast Cash Disbursements Ch. 12: Managing Cash Flow 12 - 20 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 - 21 Ch. 12: Managing Cash Flow Preparing a Cash Budget
(continued) 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 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?) Ch. 12: Managing Cash Flow 12 - 23 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 - 24 Ch. 12: Managing Cash Flow Benefits of Cash Management 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 The "Big Three" of Cash Management
1. Accounts Receivable 2. Accounts Payable 3. Inventory Ch. 12: Managing Cash Flow 12 - 26 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 - 27 Ch. 12: Managing Cash Flow FIGURE 12.5 2005. Cash Flow Concerns Source: Based on American Express Corporation, Ch. 12: Managing Cash Flow 12 - 28 Beating the Cash Crisis
Accounts Receivable 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 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 - 30 Ch. 12: Managing Cash Flow Beating the Cash Crisis
Accounts Payable 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 The Cost of Foregoing a Cash Discount
$1,000 invoice 2/10, net 30
$20 Amount $980 $1,000 Day 0 10 20 days 30 I Rate = P x T
Ch. 12: Managing Cash Flow = $20 $980 x 20/365 = 37.25% 12 - 32 Beating the Cash Crisis
Accounts Payable 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 Beating the Cash Crisis
Inventory 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 - 34 Ch. 12: Managing Cash Flow 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
Ch. 12: Managing Cash Flow 12 - 35 Avoiding the Cash Crunch 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 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 Ch. 12: Managing Cash Flow 12 - 37 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. Ch. 12: Managing Cash Flow 12 - 38 ...
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- Spring '08
- Corporate Finance, Generally Accepted Accounting Principles, invoice