BA350

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Chapter Thirteen
Cash: Lifeblood of the
Business
Copyright 2021 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.

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Money as the Key Idea
Money is an accepted medium of exchange.
Three purposes for money.
• To facilitate exchanges of unlike assets, such
as your labor for a grocer’s food.
• To measure the value of things, both tangible
and intangible.
• To keep track of wealth.
What makes money “money” is the belief users
have about the information contained in the
money.
Profits are not
money.
Profits are
information useful
in predicting when
and how much
money you may
collect.

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Cash and Cash Equivalents
Cash is money that is immediately available to be spent.
• Businesses use a concept called cash equivalents which are assets
that may be turned into cash within a few days.
• Currency is a familiar form of cash: bills and coins.
• Demand deposits make up most of the non-currency cash.
• Marketable securities are stocks and bonds representing either
ownership or debt of public firms and government issued debt.
• Commercial paper and short-term debt are two forms of short-term
financing by issuing a note for cash to another company – issued to be
paid to the bearer of the note and fully transferable.

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The Importance of Cash Management
The process of controlling how much and when money will come into and
go out of the business is referred to as cash flow management.
Cash flow management is:
• Having enough cash available to
meet business needs.
• Ability to quickly obtain cash
from a variety of sources.
• Understanding how (and when)
cash is used by your business.
• Monitoring accounts receivable
for late payments and providing
motivation for prompt payments.
• Using prompt payment discounts
when cheaper than borrowing.
Cash flow management is not:
• Keeping large sums of cash on
hand at all times.
• Obtaining all cash from
business operations.
• Assuming that all sales and
expenses happen instantly.
• Trusting customers to pay when
the bill comes due.
• Providing lengthy credit terms
without charging interest.
• Allowing large sums to “sit” in
non-interest-paying accounts.

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Money In/Money Out – Just How Important Is It?
A firm must manage
the timing of the
receipt of cash to the
timing of the need to
expend cash.
This is called the
cash-to-cash cycle
or the operating
cycle.
You create a payable
when you buy on
credit and customer’s
promises to pay are
receivables.
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Figure 13.3: Cash-to-Cash Cycle – Many Vendors, Few
Customers
A construction firm has
irregular, large cash
receipts while expenses
are smaller consistent
amounts.

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Figure 13.4: Cash-to-Cash Cycle – Few Vendors, Many
Customers
A restaurant has
frequent small cash
receipts while
expenses are less
frequent but in larger
amounts.

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Planning Cash Needs
The Sales Budget: Forecasting Sales Receipts
The key to cash planning is the cash budget, which needs a sales forecast.
• For many small businesses, the sales forecast is the cash receipts
forecast – each with its own pattern of sales and cash receipts.
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Planning Cash Needs
The Cash Receipts Budget
Understanding
and predicting
the patterns of
cash flows
begin when
you prepare a
cash receipts
budget.
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Table 13.2B: Cash Receipts Budget
Once the pattern of cash collections is understood, the numbers may be
converted into a cash receipts budget.
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Planning Cash Needs
Forecasting Cash Disbursements
A similar
approach is
used for the
forecasting of
cash
disbursements
into a cash
disbursement
budget.
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Table 13.4: Cash Budget
The Chapter 12 budgets and the cash budget combine to make the
comprehensive budget.
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Planning Cash Needs
The Comprehensive Budget: the Pro Forma Cash Flow Statement
The statement of cash
flows is essentially the
cash flow budget, but
with cash flow placed
into the categories of
cash from operations,
cash from investing, and
cash from financing.
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Managing Cash Flows
Cash only comes from three sources.
• By selling the products/services and collecting cash from customers,
called cash flow from operations.
• From investments such as stocks, bonds, land, buildings, or
equipment, called cash flow from investing.
• Through financing, either for ownership or in the form of a loan.
Protect cash from embezzlement, skimming, or phony disbursements.
• Effective separation of duties is effective.
• Run credit checks periodically.
• Identify opportunities to steal and investigate budget variances.
• Conduct a formal audit and adopt a formal statement of ethics.
• Provide coaching but terminate employees not meeting standards.
• Provide education about the economies of your business to employees.

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Steps to Take for Effective Cash Flow Management
1. Review your cash needs on a set schedule.
2. Arrange a business line of credit or revolving loan before you need it.
3. Obtain a business credit card.
4. Collect your receivables – do not become an interest-free bank.
5. Plan and schedule your payments.
6. Use online collections and payments.

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Increasing Cash Inflows and Decreasing Cash Outflows
• Taking deposits and progress
payments.
• Offering discounts for prompt
payment.
• Asking for your money.
• Take on paying noncore
projects.
• Factoring receivables.
• Make wise purchase decisions
and avoid waste.
• Trade discounts.
• Employee noncash incentives.
• Use of temporary agencies.
• Consignment and barter.
• Control timing of paying out
cash.
• Negotiation of terms with
suppliers.
• Timing purchases.
• Gaming of the payment
process.

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Controlling Cash Shortages
One cause of cash shortage is a growth trap.
• Due to increased sales, you need more labor, more materials, more
factory space, and more warehouse space – all require money.
Strategies to handle cash shortfalls, by frequency of use.
• Use personal money.
• Borrow.
• Adjust scheduled purchases.
• Adjust scheduled payments.
• Try to collect money due.
• Sell investments.
• Sell receivables.
• Lay off employees.

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Appendix: Reconciling Bank Balances with Company Book
Balances
Key to managing your daily cash flow is knowing how much cash is
available at that moment – the bank’s available balance may not be true.
• To get a more realistic number, you need to reconcile the differences
between bank and book balances.
• The company book balance is the sum of the company’s internal
accounting record of all transactions that affect cash.
• Your books show a credit card purchase on the day of sale, while the
bank will not receive the payment for up to three working days.
• The bank ledger balance is the amount that recognizes all
transactions that affect the balance – still not a true measure.
• The key measure is called the bank available balance, which is the
actual cash value of the account and can vary from ledger balance.

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Appendix: Company and Bank Cash Balances
Deposits of cash, electronic transfers, and cash withdrawals result in
immediate changes in the available balance.
• Checks, drafts, and automated clearinghouse payments result in
receipts or disbursements of money only after some delay.
• Some banks allow customers to overdraft by paying a check when
the available balance is not sufficient to cover the check amount.
Two reasons to reconcile the bank balance and the book balance.
• The bank knows information you cannot know – service charges,
direct payments, interest, nonsufficient funds (NSF).
• You know information the bank cannot know – value of checks written
and mailed, and deposits mailed or made after bank closing.

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Appendix: Reconciling – a Two-Step Process
1. Add (subtract) to the bank balance those things you know the bank does
not know.
2. Add (subtract) to your book balance those things the bank knows that
you do not know until you receive the bank statement.
The corrected bank balance and the corrected book balance will be identical.
Accepting credit card payments causes significant differences because:
• Your business records the gross amount of the sale, while the credit
card provider deposits the sale amount less the service fee.
• You show the sale deposited on the sale date, while the provider takes
up to three working days to actually deposit money to your account.
• Credit card clearing services reduce the amount deposited, or will
charge back the amount in the event of fraud or customer challenge.

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Appendix: Reconciling Serves Four Purposes
• It gives you a way to estimate the bank’s available balance for the
purpose of managing your cash flows.
• Regular reconciliation identifies any mistakes made by either the bank
or by your own bookkeeper – and they do happen.
• It checks the accuracy of both the bank and business records,
providing an accurate statement of the value of cash the firm holds.
• A reconciliation lets you know about items on the bank statement that
would not otherwise be included in the accounting records.

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