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Managing Cash Flow Chapter 12
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Cash Management the process of forecasting, collecting, disbursing, investing, and planning for the cash a company needs to operate smoothly.
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Cash Flow Cycle the time lag between paying suppliers for merchandise or materials and receiving payment from customers.
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Cash and Profits Are Not the Same When analyzing cash flow, entrepreneurs must understand that cash and profits are not the same. Attempting to discern the status of a small company’s cash position by analyzing its profitability is futile; profitability is not necessarily highly correlated with cash flow.
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Profit vs Cash Flow Profit (or net income) is the difference between a company’s total revenue and its total expenses. It measures how efficiently a business is operating. Cash is the money that is free and readily available to use in a business. Cash flow measures a company’s liquidity and its ability to pay its bills and other financial obligations on time by tracking the flow of cash into and out of the business over a period of time. Many small business owners soon discover that profitability does not guarantee liquidity.
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Cash Budget a “cash map” showing the amount and the timing of cash receipts and cash disbursements on a daily, weekly, or monthly basis.
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Creating a cash budget requires five basic steps: Determining an adequate minimum cash balance Forecasting sales Forecasting cash receipts Forecasting cash disbursements Estimating the end-of-month cash balance
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The “Big Three” of Cash Management The three variables are leading indicators of a company’s cash flow are accounts receivable, accounts payable, and inventory. If a company’s accounts-receivable balance is increasing, its cash balance may be declining. Similarly, accounts- payable and inventory balances that are increasing faster than sales are signs of mounting pressure on a company’s cash flow. A good cash management “recipe” involves accelerating a company’s receivables to collect cash as quickly as possible, paying out cash as slowly as possible (without damaging the company’s credit rating), and maintaining an optimal level of inventory.
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Cash Conversion Cycle a measure of the length of time required to convert inventory and accounts payable into sales and accounts receivable and finally back into cash. Equals days’ inventory outstanding + days’ sales outstanding – days’ inventory outstanding.
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Discounts Quantity Discounts – discounts that give businesses a price break when they order large quantities of merchandise and supplies. They exist in two forms: cumulative and noncumulative. Cash Discounts – discounts offered to customers as an incentive to pay for merchandise promptly.
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