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Managing Cash Flow Cash Management The process of forecasting, collecting, disbursing, investing, and planning for the cash a company needs to operate smoothly Cash Flow Cycle Order goods Receive goods 14 Pay invoice 25

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Presentation Transcript
cash management
Cash Management
  • The process of forecasting, collecting, disbursing, investing, and planning for the cash a company needs to operate smoothly
cash flow cycle
Cash Flow Cycle
  • Order goods
  • Receive goods 14
  • Pay invoice 25
  • Sell goods 178
  • Deliver goods 3
  • Send invoice 9
  • Customer pays 50
  • Total 240 days
cash flow
Cash Flow

CASH

CASH SALES

ACCOUNTS PAYABLE

ACCOUNTS RECEIVABLE

PRODUCTION/CASH PURCHASES

INVENTORY

cash budget
Cash Budget

A cash map showing the amount and the timing of cash receipts and cash disbursements on a daily, weekly, or monthly basis

cash budget6
Cash Budget
  • Step 1 Determining an Adequate Minimum Cash Balance
  • Step 2 Forecasting Sales (pessimistic, most likely, optimistic)
  • Step 3 Forecasting Cash Receipts
  • Step 4 Forecasting Cash Disbursements
  • Step 5 Estimating the End-of-month Cash Balance
forecasting sales for a business start up
Forecasting Sales for a Business Start-up

Example

No. of cars in trading zone 84,000

% imported 24%

No. of imported cars in trading zone 20,160

Average expenditure in repairs $485

Total repair sales potential $9,777,600

Estimated share of market 9.9%

Sales estimate $967,982

causes of cash flow problems in small business
Causes of Cash Flow Problems in Small Business
  • Difficulty collecting A/R 29.7%
  • Seasonal sales patterns 22.8%
  • Unexpected variations in sales 15.4%
  • Weak sales 13.1%
collecting delinquent accounts
Collecting Delinquent Accounts

No. of Months % Probability

Delinquent of Collection

1 93.8%

2 85.2%

3 73.6%

6 57.8%

9 42.8%

12 23.6%

24 13.6%

big 3 of cash management
Big 3 of Cash Management
  • Accounts Receivable

collect early

  • Accounts Payable

stretch payments

  • Inventory

don’t tie up cash in wrong inventory

cash flow concerns
Cash Flow Concerns
  • Collecting A/R 35%
  • Paying bills on time 26%
  • Having enough cash

to attract new clients 22%

  • Tracking cash flow 11%
  • Meeting payroll 6%
accounts receivable
Accounts Receivable

Credit and collection policy

  • Screen customers before extending credit
  • Write a firm credit policy/let customers know
  • Send invoices promptly, clearly and accurately
  • Encourage prompt payment
  • Take immediate action when an account falls overdue
accounts receivable13
Accounts Receivable

Encouraging prompt payment

  • Clear, accurate, timely invoices
  • Clear description and account number
  • Prices and language that agree with the price quotation on orders and contracts
  • Highlighted balance due and terms
  • Contact info
accounts receivable14
Accounts Receivable

Collection Blunders

  • Delaying collection calls
  • Failing to clearly ask for payment
  • Sounding desperate
  • Talking tough
  • Trying to find out the customer’s problem
  • Asking customers how much they can pay
  • Continuing to talk after getting a promise to pay
  • Calling not prepared
  • Trusting your memory
  • Letting the computer control collection efforts
accounts receivable15
Accounts Receivable

Other Techniques to Accelerating A/R

  • Use email or fax for orders and invoices
  • Send invoices as soon as goods are shipped
  • Highlight invoice due date and late payment penalties
  • Restrict credit until all bills are paid
  • Deposit daily
  • Closely monitor top 20% of customers who make 80% of receivables
  • Ask for partial payment up front
  • Watch out for customers that are going bankrupt
  • Consider lockbox services
  • Track results of collection efforts
  • Consider a security agreement
accounts payable
Accounts Payable
  • Verify all supplier invoices before paying them
  • Stretch payment as far as practical
  • Take advantage of cash discounts
  • Get favorable credit terms
  • Work out payment terms
  • Use credit cards
inventory
Inventory
  • Shed slow-moving inventory
  • Schedule delivery dates at the latest possible
  • Get from fastest suppliers
coping with cash crunch
Coping with Cash Crunch
  • Investing personal funds 28%
  • Postponing purchases 18%
  • Obtaining line of credit 18%
  • Using a credit card 12%
  • Using a short-term loan 11%
  • Leasing rather than purchasing 4%
avoiding the cash crunch
Avoiding the Cash Crunch
  • Barter
  • Trim Overhead Costs
  • Sell gift cards
  • Switch to ZBB
  • Look out for employee theft
  • Keep business plan current
  • Invest surplus cash
avoiding the cash
Avoiding the Cash
  • Ask for discounts or freebies
  • Periodically evaluate expenses
  • Lease, instead of buy
  • Avoid nonessential outlays
  • Negotiate to cash flow cycle
  • Buy used or reconditioned equipment
  • Outsource
  • Control employee advances or loans
  • Develop system for check fraud
  • Change shipping terms