Managing

Managing
Cash
Cash Flow
Flow

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 1
 Cash Management
 Common cause of business failure: Cash
crisis!

 A business can be earning a profit and be

forced to close because it runs out of cash!

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 2
 Cash Management
 Cash management – forecasting, collecting,
disbursing, investing, and planning for the cash a
company needs to operate smoothly.

 Young, growing companies are “cash sponges.”

 Know your company’s cash flow cycle.

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 3
 The Cash Flow Cycle

Deliver
Goods
Order Receive Pay Sell Send Customer
Goods Goods Invoice Goods* Invoice Pays**

Day 1 15 40 218 221 230 280

14 25 178 3 9 50

Cash Flow Cycle = 240 days

* Based on Average Inventory Turnover: ** Based on Average Collection Period:

365 days = 178 days 365 days = 50 days

2.05 times/year 7.31 times/year
 Five Cash Management Roles of
an Entrepreneur
 Cash Finder
 Cash Planner
 Cash Distributor
 Cash Collector
 Cash Conserver

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 5
 Cash Flow
Increase in Cash Decrease in Cash
Cash

Leakage

Accounts Receivable Accounts Payable

Cash Sales Production/Cash Purchases

Inventory

Leakage
 The 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.

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 7
 Preparing a Cash
Budget
 Determine a Minimum Cash Balance
 Forecast Sales
 Forecast Cash Receipts
 Forecast Cash Disbursements
 Estimate End-of-Month Cash Balance

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 8
 Sample Cash Budget

Particulars Year 1
A. Opening Cash Balance 2,481,226
Cash Inflow  
Revenue 74,637,500
Interest Income Received -
Total Cash Inflow 77,118,726
   
B. Cash Outflow  
Cash Operating Expenses 45,536,000
Loan Repayment -
Tax 6,263,281
Dividend -
Total Cash Outflow 51,799,281
Investment -
Closing Cash Balance (A-B-Investment) 25,319,445

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 9
 Determine a Minimum
Cash Balance
 Not too much...
 not too little...
 but a cash balance that's just right ... for
you!

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 10
 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.

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 11
 Forecast Sales
 Prepare three sales forecasts:
 Most Likely

 Pessimistic

 Optimistic

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 12
 Forecast 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.
 Monitor closely slow and nonpayers.

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 13
 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 “
 Don’t know where to begin? Try making a
daily list of the items that generate cash and
those that consume it.

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 14
 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?)

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 15
 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

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 16
 Benefits of Cash Management
 Develop a sound borrowing and repayment
program
 Impress lenders and investors
 Reduce borrowing costs by borrowing only when
necessary
 Provide funds for expansion
 Plan for investing surplus cash

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 17
 The “Big Three” of
Cash Management
 Accounts Receivable
 Accounts Payable
 Inventory

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 18
 Accounts Receivable
 About 90 percent of industrial and wholesale
sales are on credit, and 40 percent of retail sales
are on account.
 Survey of small companies across a variety of
industries found that 77 percent extend credit
to their customers.
 Remember: “A sale is not a sale until you
collect the money.”
 The goal with accounts receivable is to collect
your company’s cash as fast as you can.

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 19
 Beating the Cash Crisis
Accounts Receivable
 Establish a firm credit-granting policy.
 Screen credit customers carefully.
 When an account becomes overdue, take action
immediately.
 Add finance charges to overdue accounts (check
the law first!).
 Develop a system of collecting accounts.
 Send invoices promptly.

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 20
 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

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 21
 Accelerating Accounts
Receivable
 Identify the top 20 percent of your customers and
monitor them closely
 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

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 22
 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.

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 23
 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.

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 25
 Beating the Cash Crisis
Inventory
 Monitor it closely; it 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.

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 26
 Avoiding the Cash Crunch
 Consider bartering, exchanging goods and
services for other goods and services, to
conserve cash.
 Trim overhead costs. For example:
 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

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 27
 Avoiding the Cash Crunch
(Continued)

 Trim overhead costs. For example:

 Buy used equipment
 Hire part-time employees and freelancers
 Outsource nonessential activities
 Control employee advances and loans
 Establish an internal security and control system
 Devise a method for fighting check fraud
 Change shipping terms
 Start selling gift cards
 Switch to zero-based budgeting

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 28
 Avoiding the Cash Crunch
(Continued)

 Be on the lookout for employee theft

 Keep your business plan current
 Invest surplus cash

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 29
 THANK YOU

Chapter 12: Cash Mgt Copyright 2008 Prentice Hall Publishing Company 30