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Teaching cash flow management

Cash is King. Teaching cash flow management. Greg Malkin Director, Entrepreneur Institute 216-831-2200 x7362 gmalkin@us.edu. Syllabus 3 week unit plan. Profit versus Cashflow. Profit = Revenues - Expenses Cashflow = Deposits into and withdrawals from our bank account.

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Teaching cash flow management

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  1. Cash is King Teaching cash flow management Greg Malkin Director, Entrepreneur Institute 216-831-2200 x7362 gmalkin@us.edu

  2. Syllabus 3 week unit plan

  3. Profit versus Cashflow • Profit = Revenues - Expenses • Cashflow = Deposits into and withdrawals from our bank account.

  4. Profit versus Cashflow • Matching = match revenue & expenses in the same period to determine profit. • Timing = Cashflow does not necessarily match the recognition of revenue and expenses.

  5. The Cash Management Process • Estimate receipts (cash inflows) • Plan expenditures (cash outflows) • Limit spending to budget (cash control) • Compare budgeted to actual cashflows (evaluation)

  6. Cash Management Example

  7. Homework Assignment

  8. Case StudyCarrie Snowblower

  9. Sales 2,200 units x $200 $440,000 Cost of Sales 2,200 units x $100 220,000 Gross margin 220,000 Less: SG&A Cash and noncash 131,000 Interest payable 1% per month on ending balance 3,311 Net income $ 85,689 Carrie’s Snowblowers (Q4 Income Statement) Fourth Quarter Income Statement, Carrie Company Will the company have to borrow money even though it is so profitable?

  10. Cash collections for the month. = 30% of the current sales + 60% of previous month’s credit sales + 35% of two month’s previous credit sales Cash collections for December = $141,800 = 30% x $300,000 = $90,000 + 60% x (70% x $100,000) = $42,000 + 35% x (70% x $40,000 = $9,800 Cash collections for January = $180,500 = 30% x $100,000 = $30,000 + 60% x (70% x $300,000) = $126,000 +35% x (70% x $100,000) = $24,500 Cash collections for February = ______ Carrie’s Snowblowers (Cash Receipts) • 30% of all sales are for cash, 60% of receivables are collected in the month following the sale, 35% are collected two months after the purchase, and the rest become bad debts. There are no accounts receivable outstanding at the beginning of October. • You will need to calculate the budgeted cashflows from sales for January, February and March. Cash collections for March = ________

  11. Required purchases during the current month Sales for the current month + Ending inventory - Beginning Inventory + (120% x next month’s sales - (120% x current month’s sales Purchases for October = 600 units = 200 units + 1.2 x 500 units - 200 units Purchases for November = 1,700 units = 500 units + 1,800 units - 600 units Purchases for December = ________ Purchases for January = ___________ Carrie’s Snowblowers (Inventory purchases) Purchases for February = ___________ Purchases for March = ___________

  12. October purchases = $42,000 = .45 x 600 units x $100 + $15,000 (given) November purchases = $109,500 = .45 x 1,700 units x $100 + .55 x 600 units x $100 December purchases = $107,000 = .45 x 300 units x $100 + .55 x 1,700 units x $100 January purchases = ____________ February purchases = ____________ Carrie’s Snowblowers (Purchases payments) Cost of goods is $100 per unit. Inventories are bought on credit. 45% paid in the month of purchase and 55% paid in the following month. Accounts payable at the beginning of October were $15K. Purchases = 45% x current month’ purchases + 55% x last month’s Current month Last month March purchases = ____________

  13. October November December 4th Quarter Beginning Cash Balance $40,000 $20,000 $ 20,000 $ 40,000 Cash collections: Sales and Receivables $12,000 $46,800 $141,800 $200,600 Total cash available $52,000 $66,800 $161,800 $240,600 Less cash disbursements: Purchases $42,000 $109,500 $107,000 $258,500 SG&A (w/o interest) 26,000 27,500 32,500 86,000 Capital equipment 20,000 5,000 25,000 Total cash requirements $68,000 $157,000 $144,500 $369,500 Excess (Deficit) (16,000) (90,200) 17,300 (128,900) Borrowings (Repayments) $36,000 $110,200 $ 2,700 $148,900 Ending Balance $20,000 $ 20,000 $ 20,000 $ 20,000 Carrie’s Snowblowers (Q4 Cash Flow) Cash Budget for Carrie Company — 4th Quarter

  14. Sales units x $200 Cost of Sales units x $100 Gross margin Less: SG&A Cash and noncash Interest payable 1% per month on end of month loan balance Net income Carrie’s Snowblowers Quiz Name: ___________ First Quarter Income Statement, Carrie Company Assume interest is paid on the balance at the end of the month. (Example: if month ending loan balance is $8,500 then interest payment that month will be $85.

  15. January February March 1th Quarter Beginning Cash Balance $20,000 Cash collections: Sales and Receivables Total cash available Less cash disbursements: Purchases SG&A (w/o interest) Capital equipment Total cash requirements Excess (Deficit) Borrowings (Repayments) Ending Balance Carrie’s Snowblowers Quiz Name: ___________ Cash Budget for Carrie Company — 1th Quarter

  16. Final Assessment

  17. Resources Hanson Ski Products - Harvard Case Study Case: 9-187-038 Teaching notes: 5-191-031 http://hbsp.harvard.edu/ Excel for Managerial Accounting Gaylord Smith ISBN:978-0324016246 Management Accounting A Road of Discovery James Mackey & Michael Thomas ISBN: 0-538-87189 Managerial Accounting Bill Lee ISBN: 0-538-43173-3 All curriculum materials except Harvard case study Consortium Conference web site

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