Managing Working Capital and Controlling Cash Chapter 4 Managing Working Capital and Controlling Cash Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Chapter Overview Working Capital Cash Management Controls Forecasts Banking Services Credit Cards Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved
Working Capital Defined Difference between current assets and current liabilities OR Amount of cash required to operate a business Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Working Capital Amount of working capital is impacted by: Mix of cash and credit sales Credit card transaction processing Accounts receivables Food and beverage turnover Vendor terms Growth Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Working Capital Ways to minimize working capital Cash discounts Inventory turnover Good credit rating Managing accounts payables Tracking transactions Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Cash Management Cash is convertible into any other type of asset Forms of cash: Checks Money orders Marketable securities Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Cash Forecast Assists in determining the amount of working capital Management estimates cash inflows and projects cash needs for 90 days Alerts management to probable cash shortages or surpluses in advance Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Sample Cash Forecast Theresa's Catering 90-day Cash Forecast January February March Beginning Cash Balance $3,000 $13,842 $9,230 Cash Receipts Cash sales 15,080 13,520 15,280 Collection of accounts receivables -next month 68,800 52,800 57,720 Collection of accounts receivables - 2 months 12,500 17,200 13,200 Sales of fixed assets Total Cash Available 99,380 97,362 95,430 Cash Disbursements Cash purchases 2,985 3,288 3,762 Accounts payables 28,675 29,860 25,877 Payroll 28,378 29,985 35,245 Service on mortgage 10,000 Insurance premium 3,000 Property taxes 15,000 Partner cash distribution Total Cash Disbursements 85,538 88,133 87,384 Ending Cash Balance 13,842 9,230 8,046 Minimum Cash Balance Cash surplus / (deficit) 3,842 (771) (1,955) Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Banking Services Account Reconciliation Bank reconciles all cash accounts Creates a summary reconciliation report Advantage Reduces administrative costs for the business Disadvantages Set-up fee Monthly charge Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Banking Services Sweep Accounts Bank invests surplus cash balances in interest earning overnight accounts Advantage Generate additional interest Disadvantage Monthly fee Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Banking Services Lockbox Assigned a numbered P.O. box for payments Bank collects and processes payments on a daily basis Advantage Businesses can process payments quickly and securely Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Banking Services Zero Balance Account All cash accounts are consolidated into a single account Separate checking account statements are provided Advantage Eliminates the need to maintain cash balances in each account Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved
Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved Credit Cards Credit Card Transaction Fee Charged by credit card companies to merchants Fees range from 2% to 6% of the transaction price Fee is based on: average transaction price sales volume of the merchant Copyright © 2007 by John Wiley & Sons, Inc. All rights reserved