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 Pay invoice Sell goods Deliver goods Send invoice Customer pays Total

14 25 178 3 9 50 240 days

Cash Flow

CASH SALES

CASH

ACCOUNTS PAYABLE

ACCOUNTS RECEIVABLE

PRODUCTION/CASH PURCHASES

INVENTORY

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 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

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

Difficulty collecting A/R Seasonal sales patterns Unexpected variations in sales Weak sales

29.7% 22.8% 15.4% 13.1%

Collecting Delinquent Accounts

No. of Months Delinquent 1 2 3 6 9 12 24 % Probability of Collection 93.8% 85.2% 73.6% 57.8% 42.8% 23.6% 13.6%

Big 3 of Cash Management

Accounts

Receivable collect early Accounts Payable stretch payments Inventory dont tie up cash in wrong inventory

Cash Flow Concerns

Collecting A/R Paying bills on time Having enough cash to attract new clients Tracking cash flow Meeting payroll

35% 26%
22% 11% 6%

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 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 Receivable
Collection Blunders Delaying collection calls Failing to clearly ask for payment Sounding desperate Talking tough Trying to find out the customers 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 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

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

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

Coping with Cash Crunch

Investing personal funds Postponing purchases Obtaining line of credit Using a credit card Using a short-term loan Leasing rather than purchasing

28% 18% 18% 12% 11% 4%

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

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