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Managing Cash Flow

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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Managing Cash Flow

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  1. Managing Cash Flow

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

  3. 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

  4. Cash Flow CASH CASH SALES ACCOUNTS PAYABLE ACCOUNTS RECEIVABLE PRODUCTION/CASH PURCHASES INVENTORY

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

  6. 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

  7. 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

  8. 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%

  9. 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%

  10. Big 3 of Cash Management • Accounts Receivable collect early • Accounts Payable stretch payments • Inventory don’t tie up cash in wrong inventory

  11. 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%

  12. 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

  13. 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

  14. 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

  15. 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

  16. 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

  17. Inventory • Shed slow-moving inventory • Schedule delivery dates at the latest possible • Get from fastest suppliers

  18. 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%

  19. 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

  20. 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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