Managing cash flow
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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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Cash management l.jpg
Cash Management

  • The process of forecasting, collecting, disbursing, investing, and planning for the cash a company needs to operate smoothly


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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


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Cash Flow

CASH

CASH SALES

ACCOUNTS PAYABLE

ACCOUNTS RECEIVABLE

PRODUCTION/CASH PURCHASES

INVENTORY


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Cash Budget

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


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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


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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


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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%


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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%


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Big 3 of Cash Management

  • Accounts Receivable

    collect early

  • Accounts Payable

    stretch payments

  • Inventory

    don’t tie up cash in wrong inventory


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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%


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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


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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


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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


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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


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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


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Inventory

  • Shed slow-moving inventory

  • Schedule delivery dates at the latest possible

  • Get from fastest suppliers


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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%


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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


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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


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