Managing Cash Flow

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

Cash Flow Cycle Order goods Order goods Receive goods 14 Receive goods 14 Pay invoice 25 Pay invoice 25 Sell goods 178 Sell goods 178 Deliver goods 3 Deliver goods 3 Send invoice 9 Send invoice 9 Customer pays 50 Customer pays 50 Total 240 days Total 240 days

Cash Flow CASH ACCOUNTS RECEIVABLE CASH SALESACCOUNTS PAYABLE 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 1 Determining an Adequate Minimum Cash Balance Step 2 Forecasting Sales (pessimistic, most likely, optimistic) Step 2 Forecasting Sales (pessimistic, most likely, optimistic) Step 3 Forecasting Cash Receipts Step 3 Forecasting Cash Receipts Step 4 Forecasting Cash Disbursements Step 4 Forecasting Cash Disbursements Step 5 Estimating the End-of-month Cash Balance 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 29.7% Difficulty collecting A/R 29.7% Seasonal sales patterns 22.8% Seasonal sales patterns 22.8% Unexpected variations in sales 15.4% Unexpected variations in sales 15.4% Weak sales 13.1% Weak sales 13.1%

Collecting Delinquent Accounts No. of Months % Probability Delinquent of Collection % % % % % % %

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

Cash Flow Concerns Collecting A/R 35% Collecting A/R 35% Paying bills on time 26% Paying bills on time 26% Having enough cash Having enough cash to attract new clients 22% to attract new clients 22% Tracking cash flow 11% Tracking cash flow 11% Meeting payroll 6% Meeting payroll 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, accurate, timely invoices Clear description and account number Clear description and account number Prices and language that agree with the price quotation on orders and contracts Prices and language that agree with the price quotation on orders and contracts Highlighted balance due and terms Highlighted balance due and terms Contact info Contact info

Accounts Receivable Collection Blunders Delaying collection calls Delaying collection calls Failing to clearly ask for payment Failing to clearly ask for payment Sounding desperate Sounding desperate Talking tough Talking tough Trying to find out the customer’s problem Trying to find out the customer’s problem Asking customers how much they can pay Asking customers how much they can pay Continuing to talk after getting a promise to pay Continuing to talk after getting a promise to pay Calling not prepared Calling not prepared Trusting your memory Trusting your memory Letting the computer control collection efforts Letting the computer control collection efforts

Accounts Receivable Other Techniques to Accelerating A/R Use or fax for orders and invoices Use or fax for orders and invoices Send invoices as soon as goods are shipped Send invoices as soon as goods are shipped Highlight invoice due date and late payment penalties Highlight invoice due date and late payment penalties Restrict credit until all bills are paid Restrict credit until all bills are paid Deposit daily Deposit daily Closely monitor top 20% of customers who make 80% of receivables Closely monitor top 20% of customers who make 80% of receivables Ask for partial payment up front Ask for partial payment up front Watch out for customers that are going bankrupt Watch out for customers that are going bankrupt Consider lockbox services Consider lockbox services Track results of collection efforts Track results of collection efforts Consider a security agreement Consider a security agreement

Accounts Payable Verify all supplier invoices before paying them Verify all supplier invoices before paying them Stretch payment as far as practical Stretch payment as far as practical Take advantage of cash discounts Take advantage of cash discounts Get favorable credit terms Get favorable credit terms Work out payment terms Work out payment terms Use credit cards Use credit cards

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

Coping with Cash Crunch Investing personal funds 28% Investing personal funds 28% Postponing purchases 18% Postponing purchases 18% Obtaining line of credit 18% Obtaining line of credit 18% Using a credit card 12% Using a credit card 12% Using a short-term loan 11% Using a short-term loan 11% Leasing rather than purchasing 4% Leasing rather than purchasing 4%

Avoiding the Cash Crunch Barter Barter Trim Overhead Costs Trim Overhead Costs Sell gift cards Sell gift cards Switch to ZBB Switch to ZBB Look out for employee theft Look out for employee theft Keep business plan current Keep business plan current Invest surplus cash Invest surplus cash

Avoiding the Cash Ask for discounts or freebies Ask for discounts or freebies Periodically evaluate expenses Periodically evaluate expenses Lease, instead of buy Lease, instead of buy Avoid nonessential outlays Avoid nonessential outlays Negotiate to cash flow cycle Negotiate to cash flow cycle Buy used or reconditioned equipment Buy used or reconditioned equipment Outsource Outsource Control employee advances or loans Control employee advances or loans Develop system for check fraud Develop system for check fraud Change shipping terms Change shipping terms