Teaching cash flow management Cash is King 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.

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.

The Cash Management Process Estimate receipts (cash inflows) Plan expenditures (cash outflows) Limit spending to budget (cash control) Compare budgeted to actual cashflows (evaluation) We think it is appropriate to point out to your students that cash management is simply good management and for many organizations the operational management process itself.

Cash Management Example Events Purchase $1,000 of product in September with net 30 credit Pay for product from supplier in October Gross margin is 50% Pay monthly salaries of $200 Product sales Sept Oct Nov Cash 250 500 Credit Total sales 1000

Aug Sept Oct Nov Dec Cash Flow Starting 50 -400 150 Cash in Cash sales 250 500 A/R Loan Cash Out A/P -1000 Payroll -200 Net cash Ending 200 B/S Cash Inventory Beg 750 Purchase 1000 End Total Assets 1050 350 400 Liabilities Note Payable Equity I/S Sept-Dec Revenue 2000 COGS Gross Profit Expenses 800 Net Profit 300

Homework Assignment

Case Study Carrie Snowblower

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

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. +35% x (70% x $100,000) = $24,500 + 60% x (70% x $300,000) = $126,000 = 30% x $100,000 = $30,000 Cash collections for January = $180,500 Cash collections for February = ______ + 35% x (70% x $40,000 = $9,800 + 60% x (70% x $100,000) = $42,000 = 30% x $300,000 = $90,000 Cash collections for December = $141,800 + 35% of two month’s previous credit sales + 60% of previous month’s credit sales = 30% of the current sales Cash collections for the month. Share/Pair Working with your partner, calculate the cashflows received in February from sales in February, December, and October. Cash collections for March = ________

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

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 February purchases = ____________ January purchases + .55 x 1,700 units x $100 = .45 x 300 units x $100 December purchases = $107,000 + .55 x 600 units x $100 = .45 x 1,700 units x $100 November purchases = $109,500 + $15,000 (given) = .45 x 600 units x $100 October purchases = $42,000 Share/Pair Verify the calculation of the payments for January and February. March purchases = ____________

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

Carrie’s Snowblowers Quiz Name: ___________ First Quarter Income Statement, Carrie Company Net income 1% per month on end of month loan balance Interest payable Cash and noncash SG&A Less: Gross margin units x $100 Cost of Sales units x $200 Sales 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.

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

Balance Sheet   6/30/86 - Q1 9/30/86 - Q2 12/31/86 - Q3 3/31/87 - Q4  Current Assets Cash $ 100,000.00 $ 100,000 Receivables $ 507,000.00 $ 4,580,000.00 $ 4,739,000.00 $ 1,741,000 Inventories $ 2,808,000.00 $ 1,690,000.00 $ 1,166,000.00 $ 1,869,000 Prepaid Expenses $ 241,000.00 $ 294,000.00 $ 198,000.00 $ 283,000 Total current assets $ 3,656,000.00 $ 6,664,000.00 $ 6,203,000.00 $ 3,993,000 Fixed Assets $ 3,570,000.00 $ 3,808,000.00 $ 3,987,000.00 $ 4,288,000 Less Accumulated Depreciation $ 1,398,000.00 $ 1,564,000.00 $ 1,743,000.00 $ 1,938,000 Net fixed assets $ 2,172,000.00 $ 2,244,000.00 $ 2,350,000 Other Assets $ 201,000.00 $ 247,000.00 $ 283,000.00 $ 302,000 Total Assets $ 6,029,000.00 $ 9,155,000.00 $ 8,730,000.00 $ 6,645,000  Liabilities Accounts Payable $ 1,849,000.00 $ 1,717,000.00 $ 1,755,000.00 $ 1,664,000 Notes Payable - bank $ 2,176,000.00 $ 3,727,000.00 $ 3,041,000.00 $ 1,650,000 Income tax payable $ - Current installment - long-term debt $ 980,000.00 $ 1,060,000.00 $ 207,000.00 $ 189,000 Total current liability $ 5,005,000.00 $ 6,504,000.00 $ 5,003,000.00 $ 3,503,000 Long Term Debt Term Loan Total Liability  Stockholder's Equity Common Stock $ 1,249,000.00 $ 1,249,000 Additional capital $ 105,000.00 $ 105,000 Retained Earnings $ (330,000.00) $ 1,297,000.00 $ 2,373,000.00 $ 1,788,000 Total stockholder's Equity $ 1,024,000.00 $ 2,651,000.00 $ 3,142,000

Collateral 6/30/86 - Q1 9/30/86 - Q2 12/31/86 - Q3   6/30/86 - Q1 9/30/86 - Q2 12/31/86 - Q3 3/31/87 - Q4 Year end Cash Flow Analysis Starting Cash Balance At least $100,000 156,000 100,000 Cash In Receipts 1,487,000 1,764,000 4,572,000 3,800,000 Cash Out Operating Expenses 1,928,000 2,967,000 2,698,000 2,022,000 Interest 67,000 110,000 168,000 86,000 Capital expenditures 177,000 238,000 179,000 301,000 Total cash out 2,172,000 3,315,000 3,886,000 2,409,000 Net cash available (529,000) (1,451,000) 786,000 1,491,000 End of month minimum cash balance Loan required to reach minimum cash balance (629,000) (1,551,000) 686,000 1,391,000 Cash available to payoff loan balance Loan balance Starting balance = $1,547,000 (2,176,000) (3,727,000) (3,041,000) (1,650,000) Collateral 80% of receivables 406,000 3,664,000 3,791,000 1,393,000 70% of Inventory 1,966,000 1,183,000 816,000 1,308,000 Total collateral 2,372,000 4,847,000 4,607,000 2,701,000

Desired ending inventory FORMULA3 Current month's unit sales FORMULA4 Answer Section Sales Budget June July August Units FORMULA1 Dollars FORMULA2 Unit Purchases Budget Desired ending inventory FORMULA3 Current month's unit sales FORMULA4 Total units needed FORMULA5 Beginning inventory FORMULA6 Purchases (units) FORMULA7 Purchases (dollars) FORMULA8 $0 Cash Budget Cash balance, beginning $8,000 Cash receipts: Collections from customers: From April sales FORMULA9 From May sales FORMULA10 FORMULA11 From June sales FORMULA12 From July sales From August sales   Total cash available Cash disbursements: Merchandise FORMULA13 Variable expenses FORMULA14 Fixed expenses FORMULA15 Interest paid Total disbursements Cash balance before financing Less: Desired ending balance Excess (deficit) of cash over needs Financing Borrowing Repayment Total effects of financing Cash balance, ending

Final Assessment

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