Chapter 1:The Foundations of Entrepreneurship

Ch. 12: Managing Cash Flow

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The Importance of Cash

“Everything is about cash – raising it,conserving it, collecting it.”

Guy Kawasaki

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Ch. 12: Managing Cash Flow

Common cause of business failure:

Cash crisis!

Cash Management

A business can be earning a profit and beforced to close because it runs out of cash!

American Express OPEN Small BusinessMonitor study:

►57% of small business ownersexperience problems with cash flow.

►Their biggest cash flow concern isthe ability to pay bills on time.

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Ch. 12: Managing Cash Flow

Small Business Owner’s Ratingof Their Companies’ Cash Flow

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Ch. 12: Managing Cash Flow

Cash Management

Cash management – forecasting,collecting, disbursing, investing, andplanning for the cash a company needsto operate smoothly.

Young and growing companiesare “cash sponges.”

Know your company’scash flow cycle.

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Ch. 12: Managing Cash Flow

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Ch. 12: Managing Cash Flow

The Cash Flow CycleThe Cash Flow Cycle

Order

Goods

Day

Receive

Goods

1515

Pay

Invoice

4040

1414

2525

218218

178178

Sell

Goods*

Deliver

Goods

221221

Customer

Pays**

Send

Invoice

230230

280280

5050

Cash Flow Cycle = 240 days

**Based on Average Inventory Turnover:

365 days

2.05 times/year

**Based on Average Collection Period:

365 days

7.31 times/year

= 178 days

= 50 days

Five Cash ManagementRoles of an Entrepreneur

1.Cash Finder

2.Cash Planner

3.Cash Distributor

4.Cash Collector

5.Cash Conserver

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Ch. 12: Managing Cash Flow

In addition to text

Cash and Profits

Cash ≠ profits.Cash ≠ profits.

Profit is the difference between acompany’s total revenue and totalexpenses.Profit is the difference between acompany’s total revenue and totalexpenses.

Cash is the money that is free andreadily available to use.Cash is the money that is free andreadily available to use.

Cash flow measure a company’sliquidity and its ability to pay it bills.Cash flow measure a company’sliquidity and its ability to pay it bills.

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Ch. 12: Managing Cash Flow

Cash Flow

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Ch. 12: Managing Cash Flow

Cash

Accounts Payable

Decrease in CashDecrease in Cash

Production/Cash Purchases

Inventory

Accounts Receivable

Cash Sales

Increase in CashIncrease in Cash

Leakage

The Cash Budget

A “cash map” that shows the amount and thetiming of a firm's cash receipts and cashdisbursements over time.

Predicts the amount of cash a company willneed to operate smoothly.

Helps to visualize a company’s cash receiptsand cash disbursements and the resultingcash balance.

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Ch. 12: Managing Cash Flow

Preparing a Cash Budget

1.Determine a Minimum Cash Balance

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Ch. 12: Managing Cash Flow

Remember Goldilocks, the ThreeBears, and the porridge:

►Not too much...

►Not too little...

►But a cash balance that'sjust right ... for you!

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Ch. 12: Managing Cash Flow

Determine aMinimum Cash BalanceDetermine aMinimum Cash Balance

Preparing a Cash Budget

1.Determine a Minimum Cash Balance

2.Forecast Sales

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Ch. 12: Managing Cash Flow

(continued)

Forecast Sales

The heart of the cash budget.

Sales are ultimately transformedinto cash receipts and cashdisbursements.

Cash forecast is only as accurate asthe sales forecast from which it isderived.

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Ch. 12: Managing Cash Flow

Forecast Sales

“Lumpy” or seasonal sales patterns arecommon.

►15% to 18% of wine and spirits shops’annual sales occur betweenDecember 15 and 31.

►40% of toy sales take placein last 6 weeks of the year.

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Ch. 12: Managing Cash Flow

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(continued)

Forecast Sales

Prepare three sales forecasts:

Pessimistic

Optimistic

Most Likely

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Ch. 12: Managing Cash Flow

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Sales Forecast for a Start-Up

Example:

Number of cars in trading zone 84,000

x Percent of imports x 24%

= Number of imported cars in trading zone 20,160

Number of imports in trading zone 20,160

x Average expenditure on repairs x $485

= Total import repair sales potential $9,777,600

Total import repair sales potential $9,777,600

x Estimated market share x 9.9%

= Sales estimate $967,982

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Ch. 12: Managing Cash Flow

Preparing a Cash Budget

1.Determine a Minimum Cash Balance

2.Forecast Sales

3.Forecast Cash Receipts

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Ch. 12: Managing Cash Flow

(continued)

Forecast Cash Receipts

Record all cash receipts when the cashis actually received (i.e. the cashmethod of accounting).

Determine the collection pattern forcredit sales; then add cash sales.

Monitor closely:Slow and non-payers.

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Ch. 12: Managing Cash Flow

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Ch. 12: Managing Cash Flow

Probability of CollectingAccounts Receivable

Preparing a Cash Budget

1.Determine a Minimum Cash Balance

2.Forecast Sales

3.Forecast Cash Receipts

4.Forecast Cash Disbursements

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Ch. 12: Managing Cash Flow

(continued)

Forecast Cash Disbursements

Record disbursements when you expect tomake them.

Start with those disbursements that are fixedamounts due on certain dates.

Review the business checkbook to ensureaccurate estimates.

Add a cushion to the estimate to account for“Murphy’s Law.”

Don’t know where to begin? Try making adaily list of the items that generate cash andthose that consume it.

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Ch. 12: Managing Cash Flow

Cash Flow Concerns amongSmall Business Owners

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Ch. 12: Managing Cash Flow

Preparing a Cash Budget

1.Determine a Minimum Cash Balance

2.Forecast Sales

3.Forecast Cash Receipts

4.Forecast Cash Disbursements

5.Estimate End-of-Month Cash Balance

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Ch. 12: Managing Cash Flow

(continued)

EstimateEnd-of-Month Balance

Take Beginning Cash Balance ...

Add Cash Receipts ...

Subtract Cash Disbursements

Result is Cash Surplusor Cash Shortage(Repay or Borrow?)

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Ch. 12: Managing Cash Flow

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Benefits of Cash Management

Increase amount and speed of cash flowing intothe company

Reduce the amount and speed of cash flowingout

Make the most efficient use of available cash

Take advantage of money-saving opportunitiessuch as cash discounts

Finance seasonal business needs

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Ch. 12: Managing Cash Flow

Benefits of Cash Management

Develop a sound borrowing and repaymentprogram

Develop a sound borrowing program

Impress lenders and investors

Provide funds for expansion

Plan for investing surplus cash

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Ch. 12: Managing Cash Flow

(continued)

The “Big Three”of Cash Management

1.Accounts Receivable

2.Accounts Payable

3.Inventory

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Ch. 12: Managing Cash Flow

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Accounts Receivable

About 90% of industrial and wholesale salesare on credit, and 40% of retail sales are onaccount.

Survey of small companies across a variety ofindustries found that 77% extend credit to theircustomers.

Remember: “A sale is not a sale until youcollect the money.”

Accounts receivable goal: Collect yourcompany’s cash as fast as you can.

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Ch. 12: Managing Cash Flow

Beating the Cash Crisis

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 actionimmediately.

►Add finance charges to overdue accounts(check the law first!).

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Ch. 12: Managing Cash Flow

Accounts ReceivableAccounts Receivable

AcceleratingAccounts Receivable

Ensure that invoices are accurate andtimely.

Include a description of the goods orservices purchased.

Ensure that invoices match purchase ordersor contracts.

Highlight the balance dues and due date.

Include contact information in casecustomers have questions.

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Ch. 12: Managing Cash Flow

Beating the Cash Crisis

Stretch out payment times as long aspossible without damaging your creditrating.

Verify all invoices before paying them.

Take advantage of cash discounts.

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Ch. 12: Managing Cash Flow

Accounts PayableAccounts Payable

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The Cost of Foregoing a Cash Discount$1,000 invoice 2/10, net 30

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Ch. 12: Managing Cash Flow

DayDay

AmountAmount

1010

3030

$1,000$1,000

$980$980

20 days20 days

$20$20

R =R =

P x TP x T

$20$20

$980 x 20/365$980 x 20/365

= 37.25%= 37.25%

Beating the Cash Crisis

Negotiate the best possible terms with yoursuppliers.

Be honest with creditors; avoid the “the checkis in the mail” syndrome.

Schedule controllable cash disbursements tocome due at different times.

Use credit cards wisely.

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Ch. 12: Managing Cash Flow

Accounts PayableAccounts Payable

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Beating the Cash Crisis

Monitor it closely; inventory can drain acompany’s cash.

Avoid inventory “overbuying.”It ties up valuable cash ata zero rate of return.

Arrange for inventory deliveriesat the latest possible date.

Negotiate quantity discounts with supplierswhen possible.

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Ch. 12: Managing Cash Flow

InventoryInventory

Avoiding the Cash Crunch

Consider bartering, exchanging goods andservices for other goods and services, toconserve cash.

Trim overhead costs:

►Ask for discounts and “freebies”

►Periodically evaluate expenses

►Lease rather than buy

►Avoid nonessential cash outlays

►Negotiate fixed loan paymentsto coincide with yourcompany’s cash flow

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Ch. 12: Managing Cash Flow

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Avoiding the Cash Crunch

Trim overhead costs:

►Buy used equipment

►Hire part-time employees and freelancers

►Outsource nonessential activities

►Establish an internal security and control system

►Develop a system to battle check fraud

►Change shipping terms

►Use e-mail rather than mail

►Use credit cards for small purchases

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Ch. 12: Managing Cash Flow

(continued)(continued)

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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

Build a cash cushion

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Ch. 12: Managing Cash Flow

(continued)(continued)

Conclusion

“Cash is King”

Cash and profits are not the same.

Entrepreneurial success means operatinga company “lean and mean.”

►Trim wasteful expenditures.

►Invest surplus funds.

►Plan and manage cash flow.

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Ch. 12: Managing Cash Flow

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Ch. 12: Managing Cash Flow