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Section 3:
Launching the Business
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Essentials of Entrepreneurship and Small
Business Management
Ninth Edition
Chapter 13
Managing Cash Flow
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Learning Objectives (1 of 2)
1. Explain the importance of cash management to a small
company’s success.
2. Differentiate between cash and profits.
3. Describe the five steps in creating a cash budget.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Learning Objectives (2 of 2)
4. Describe fundamental principles involved in managing
the “big three” of cash management: accounts
receivable, accounts payable, and inventory.
5. Explain the techniques for avoiding a cash crunch in a
small company.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
The Importance of Cash
• “Everything is about cash – raising it, conserving it,
collecting it.” ~ Guy Kawasaki
• Common cause of business failure: Cash crisis!
• It is possible for a business to earn a profit and still go out
of business by running out of cash.
– Valley of death
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
The Valley of Death
Figure 13.1 The Valley of Death
Source: Based on Yoshitaka Osawa and Kumiko Miyazaki, “An Empirical Analysis of the Valley of Death:
Large Scale R&D Project Performance in a Japanese Diversified Company,” Asian Journal of
Technology Innovation, vol. 14, no. 2, 2006, pp. 93–116.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Cash Management (1 of 2)
• Wasp Barcode survey:
– 42% of the owners of small businesses with 50 or
fewer employees say that managing cash flow is the
top business problem they face
• Startup Founder Data survey:
– 75% of start-up founders report cash flow concerns as
their top challenge
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Small Business Owner’s Rating of their
Companies’ Cash Flow
Figure 13.2 Small Business Owners’ Ratings of Their
Companies’ Cash Flow
Source: Based on data from Wells Fargo Small Business Index, 3rd Quarter, 2017, pp. 12–13.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Cash Management (2 of 2)
• Cash management:
– The process of forecasting, collecting, disbursing,
investing, and planning for the cash a company needs
to operate smoothly.
• Young and growing companies are “cash sponges.”
• Know your company’s cash flow cycle.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Signs of an Impending Cash Flow Crisis (1 of 2)
• Excess supplies of inventory
• Large stock of “old” inventory items that never sold
• Significant volume of fixed asset purchases, such as
machinery and equipment
• Accounts receivable that are past due and growing
• Failing to take advantage of cash discounts from vendors
and suppliers
• Late payments to vendors and suppliers
• Missed quarterly tax payments
• Past-due loan payments
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Signs of an Impending Cash Flow Crisis (2 of 2)
• Above-average interest expense because of excessive business
debt
• Average collection period ratio above the industry median
• Missed sales because popular inventory items are out of stock
• Difficulty meeting payroll on time
• Rapid increase in business expenses
• Rapid increase in accounts receivable balance
• Minimal or no financial controls in place to monitor potential theft
• Infrequent preparation and use of financial statements as a
managerial tool
• Failure to develop cash flow forecasts
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Cash Flow Cycle (1 of 2)
• Cash flow cycle:
– the time lag between paying suppliers for merchandise
or materials and receiving payment from customers
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Cash Flow Cycle (2 of 2)
Figure 13.3 The Cash Flow Cycle
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Cash and Profits
• Cash ≠ profits.
• Profit is the difference between a company’s total revenue
and total expenses.
• Cash is the money that is free and readily available to use.
• Cash flow measures a company’s liquidity and its ability to
pay it bills.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
The Cash Budget
• Cash budget:
– A “cash map” that shows the amount and the timing of
a firm's cash receipts and cash disbursements over
time.
• Predicts the amount of cash a company will need to
operate smoothly.
• Helps to visualize a company’s cash receipts and cash
disbursements and the resulting cash balance.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Cash Flow
Figure 13.5 Cash Flow
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Preparing a Cash Budget
Five steps:
1. Determining an adequate minimum balance.
2. Forecasting sales.
3. Forecasting cash receipts.
4. Forecasting cash disbursements.
5. Estimating the end-of-the-month cash balance.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Determine an Adequate Minimum Cash
Balance
• Step 1
– The most reliable method of deciding the right
minimum cash balance is based on past experience.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Forecast Sales (1 of 2)
• Step 2
– The heart of the cash budget.
– Sales are ultimately transformed into cash receipts and
cash disbursements.
– Cash forecast is only as accurate as the sales forecast
from which it is derived.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Forecast Sales (2 of 2)
• “Lumpy” or seasonal sales patterns are common.
– 15% to 18% of wine and spirits shops’ annual sales
occur between December 15 and 31.
– 40% of toy sales take place in last 6 weeks of the year.
• Prepare three sales forecasts:
– Pessimistic
– Optimistic
– Most Likely
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Sales Forecast for a Start-Up
Example:
Number of cars in trading zone 84,000 autos
× Percent of imports × 24 %
= Number of imported cars in trading zone 20,160 imports
Number of imports in trading zone 20,160 imports
× Average expenditure on repairs and maintenance × $485
= Total import repair sales potential $9,777,600
Total import repair sales potential $9,777,600
× Estimated share of the market × 9.9%
= Sales estimate $967,982
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Forecast Cash Receipts
• Step 3
– Record all cash receipts when the cash is actually
received (i.e. the cash method of accounting).
– Determine the collection pattern for credit sales; then
add cash sales.
– Monitor closely: Slow and non-payers.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Probability of Collecting Accounts
Receivable
Figure 13.6 Probability of Collecting Accounts Receivable
Source: Based on data from the Commercial Agency Section, Commercial Law League of America, 2011.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Forecast Cash Disbursements
• Step 4
– Record disbursements when you expect to make them.
– Start with those disbursements that are fixed amounts
due on certain dates.
– Review the business checkbook to ensure accurate
estimates.
– Add a cushion to the estimate to account for “Murphy’s
Law.”
– Don’t know where to begin? Try making a daily list of
the items that generate cash and those that consume it.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Estimate End-of-Month Balance
• Step 5
– Take Beginning Cash Balance ...
– Add Cash Receipts ...
– Subtract Cash Disbursements
– Result Is Cash Surplus or Cash Shortage (Repay or
Borrow?)
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Benefits of Cash Management (1 of 2)
• Increase amount and speed of cash flowing into the
company
• Reduce the amount and speed of cash flowing out
• Make the most efficient use of available cash
• Take advantage of money-saving opportunities such as
cash discounts
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Benefits of Cash Management (2 of 2)
• Finance seasonal business needs
• Develop a sound borrowing and repayment program
• Impress lenders and investors
• Provide funds for expansion
• Plan for investing surplus cash
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
The “Big Three” of Cash Management
• Big Three:
1. Accounts receivable
2. Accounts payable
3. Inventory
• The Big Three interact to create a company’s cash
conversion cycle:
– The length of time required to convert inventory and
accounts payable into sales and accounts receivable
and finally back into cash.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Cash Conversion Cycle
Figure 13.7 Cash Conversion Cycle for the Typical Small
Business
Source: Based on data from “2016 Annual Working Capital Opportunity—Corporation Size,” PwC, 2016,
www.pwc.com/gx/en/services/advisory/deals/business-recoveryrestructuring/working-capitalopportunity/size.html.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Accounts Receivable
• About 90% of industrial and wholesale sales are on credit,
and 40% of retail sales are on account.
• Dun & Bradstreet: only 13% of large U.S. companies pay
invoices by the due date.
• Remember: “A sale is not a sale until you collect the
money.”
• Accounts receivable goal: Collect your company’s cash as
fast as you can.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Establish a Credit and Collection Policy
• Screen credit customers carefully.
• Establish a firm credit-granting policy.
• Send invoices promptly.
– Cycle billing
• When an account becomes overdue, take action
immediately.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Accelerating Accounts Receivable
• Ensure that invoices are accurate and timely.
• Include a description of the goods or services purchased.
• Ensure that invoices match purchase orders or contracts.
• Highlight the balance dues and due date.
• Include contact information in case customers have
questions.
• Use a security agreement.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Accounts Payable
• Stretch out payment times as long as possible without
damaging your credit rating.
• Verify all invoices before paying them.
• Negotiate the best possible terms with your suppliers.
• Be honest with creditors; avoid the “the check is in the
mail” syndrome.
• Schedule controllable cash disbursements to come due at
different times.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Accounts Payable Patterns
Figure 13.8 Accounts Payable Pattern Among Businesses
by Size of Company
Source: Based on data from Payment Study 2016, Dun & Bradstreet, 2016, p. 44.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Inventory
• Monitor inventory closely; it can drain a company’s cash.
• Avoid inventory “overbuying.”
– It ties up valuable cash at a zero rate of return.
• Arrange for inventory deliveries at the latest possible date.
• Take advantage of discounts:
– Quantity discounts
– Cash discounts
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
A Cash Discount
Figure 13.10 A Cash Discount
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Cost of Forgoing Cash Discounts
Table 13.8 Cost of Forgoing Cash Discounts
Cash Discount Terms Cost of Forgoing the Cash
Discount (Annually)
2/10, net 30 37.25%
2/10, net 40 24.83%
3/10, net 30 56.44%
3/10, net 40 37.63%
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Avoiding the Cash Crunch (1 of 4)
• Barter
– Consider bartering, exchanging goods and services for
other goods and services, to conserve cash.
 More than 500 barter exchanges operate across the
United States.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Avoiding the Cash Crunch (2 of 4)
• Trim overhead costs:
– Ask for discounts and “freebies”
– Conduct periodic expense audits
– Lease rather than buy
 Operating lease
 Capital lease
– Avoid nonessential cash outlays
– Buy used or reconditioned equipment
– Hire part-time employees and freelancers
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Avoiding the Cash Crunch (3 of 4)
• Outsource
• Use e-mail rather than mail
• Use credit cards for small purchases
• Negotiate fixed loan payments to coincide with your
company’s cash flow
• Establish an internal security and control system
• Develop a system to battle check fraud
• Change shipping terms
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Avoiding the Cash Crunch (4 of 4)
• Start selling gift cards
• Switch to zero-based budgeting
• Be on the lookout for employee theft
• Keep your business plan current
• Build a cash cushion
• Invest surplus cash
– Money market account
– Zero-balance account
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Conclusion
• “Cash is King”
• Cash and profits are not the same.
• Entrepreneurial success means operating a company “lean
and mean.”
– Trim wasteful expenditures.
– Invest surplus funds.
– Plan and manage cash flow.
Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved.
Copyright

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  • 1. Section 3: Launching the Business Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved
  • 2. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Essentials of Entrepreneurship and Small Business Management Ninth Edition Chapter 13 Managing Cash Flow
  • 3. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Learning Objectives (1 of 2) 1. Explain the importance of cash management to a small company’s success. 2. Differentiate between cash and profits. 3. Describe the five steps in creating a cash budget.
  • 4. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Learning Objectives (2 of 2) 4. Describe fundamental principles involved in managing the “big three” of cash management: accounts receivable, accounts payable, and inventory. 5. Explain the techniques for avoiding a cash crunch in a small company.
  • 5. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. The Importance of Cash • “Everything is about cash – raising it, conserving it, collecting it.” ~ Guy Kawasaki • Common cause of business failure: Cash crisis! • It is possible for a business to earn a profit and still go out of business by running out of cash. – Valley of death
  • 6. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. The Valley of Death Figure 13.1 The Valley of Death Source: Based on Yoshitaka Osawa and Kumiko Miyazaki, “An Empirical Analysis of the Valley of Death: Large Scale R&D Project Performance in a Japanese Diversified Company,” Asian Journal of Technology Innovation, vol. 14, no. 2, 2006, pp. 93–116.
  • 7. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Cash Management (1 of 2) • Wasp Barcode survey: – 42% of the owners of small businesses with 50 or fewer employees say that managing cash flow is the top business problem they face • Startup Founder Data survey: – 75% of start-up founders report cash flow concerns as their top challenge
  • 8. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Small Business Owner’s Rating of their Companies’ Cash Flow Figure 13.2 Small Business Owners’ Ratings of Their Companies’ Cash Flow Source: Based on data from Wells Fargo Small Business Index, 3rd Quarter, 2017, pp. 12–13.
  • 9. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Cash Management (2 of 2) • Cash management: – The process of forecasting, collecting, disbursing, investing, and planning for the cash a company needs to operate smoothly. • Young and growing companies are “cash sponges.” • Know your company’s cash flow cycle.
  • 10. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Signs of an Impending Cash Flow Crisis (1 of 2) • Excess supplies of inventory • Large stock of “old” inventory items that never sold • Significant volume of fixed asset purchases, such as machinery and equipment • Accounts receivable that are past due and growing • Failing to take advantage of cash discounts from vendors and suppliers • Late payments to vendors and suppliers • Missed quarterly tax payments • Past-due loan payments
  • 11. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Signs of an Impending Cash Flow Crisis (2 of 2) • Above-average interest expense because of excessive business debt • Average collection period ratio above the industry median • Missed sales because popular inventory items are out of stock • Difficulty meeting payroll on time • Rapid increase in business expenses • Rapid increase in accounts receivable balance • Minimal or no financial controls in place to monitor potential theft • Infrequent preparation and use of financial statements as a managerial tool • Failure to develop cash flow forecasts
  • 12. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Cash Flow Cycle (1 of 2) • Cash flow cycle: – the time lag between paying suppliers for merchandise or materials and receiving payment from customers
  • 13. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Cash Flow Cycle (2 of 2) Figure 13.3 The Cash Flow Cycle
  • 14. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Cash and Profits • Cash ≠ profits. • Profit is the difference between a company’s total revenue and total expenses. • Cash is the money that is free and readily available to use. • Cash flow measures a company’s liquidity and its ability to pay it bills.
  • 15. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. The Cash Budget • Cash budget: – A “cash map” that shows the amount and the timing of a firm's cash receipts and cash disbursements over time. • Predicts the amount of cash a company will need to operate smoothly. • Helps to visualize a company’s cash receipts and cash disbursements and the resulting cash balance.
  • 16. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Cash Flow Figure 13.5 Cash Flow
  • 17. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Preparing a Cash Budget Five steps: 1. Determining an adequate minimum balance. 2. Forecasting sales. 3. Forecasting cash receipts. 4. Forecasting cash disbursements. 5. Estimating the end-of-the-month cash balance.
  • 18. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Determine an Adequate Minimum Cash Balance • Step 1 – The most reliable method of deciding the right minimum cash balance is based on past experience.
  • 19. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Forecast Sales (1 of 2) • Step 2 – The heart of the cash budget. – Sales are ultimately transformed into cash receipts and cash disbursements. – Cash forecast is only as accurate as the sales forecast from which it is derived.
  • 20. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Forecast Sales (2 of 2) • “Lumpy” or seasonal sales patterns are common. – 15% to 18% of wine and spirits shops’ annual sales occur between December 15 and 31. – 40% of toy sales take place in last 6 weeks of the year. • Prepare three sales forecasts: – Pessimistic – Optimistic – Most Likely
  • 21. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Sales Forecast for a Start-Up Example: Number of cars in trading zone 84,000 autos × Percent of imports × 24 % = Number of imported cars in trading zone 20,160 imports Number of imports in trading zone 20,160 imports × Average expenditure on repairs and maintenance × $485 = Total import repair sales potential $9,777,600 Total import repair sales potential $9,777,600 × Estimated share of the market × 9.9% = Sales estimate $967,982
  • 22. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Forecast Cash Receipts • Step 3 – Record all cash receipts when the cash is actually received (i.e. the cash method of accounting). – Determine the collection pattern for credit sales; then add cash sales. – Monitor closely: Slow and non-payers.
  • 23. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Probability of Collecting Accounts Receivable Figure 13.6 Probability of Collecting Accounts Receivable Source: Based on data from the Commercial Agency Section, Commercial Law League of America, 2011.
  • 24. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Forecast Cash Disbursements • Step 4 – Record disbursements when you expect to make them. – Start with those disbursements that are fixed amounts due on certain dates. – Review the business checkbook to ensure accurate estimates. – Add a cushion to the estimate to account for “Murphy’s Law.” – Don’t know where to begin? Try making a daily list of the items that generate cash and those that consume it.
  • 25. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Estimate End-of-Month Balance • Step 5 – Take Beginning Cash Balance ... – Add Cash Receipts ... – Subtract Cash Disbursements – Result Is Cash Surplus or Cash Shortage (Repay or Borrow?)
  • 26. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Benefits of Cash Management (1 of 2) • Increase amount and speed of cash flowing into the company • Reduce the amount and speed of cash flowing out • Make the most efficient use of available cash • Take advantage of money-saving opportunities such as cash discounts
  • 27. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Benefits of Cash Management (2 of 2) • Finance seasonal business needs • Develop a sound borrowing and repayment program • Impress lenders and investors • Provide funds for expansion • Plan for investing surplus cash
  • 28. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. The “Big Three” of Cash Management • Big Three: 1. Accounts receivable 2. Accounts payable 3. Inventory • The Big Three interact to create a company’s cash conversion cycle: – The length of time required to convert inventory and accounts payable into sales and accounts receivable and finally back into cash.
  • 29. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Cash Conversion Cycle Figure 13.7 Cash Conversion Cycle for the Typical Small Business Source: Based on data from “2016 Annual Working Capital Opportunity—Corporation Size,” PwC, 2016, www.pwc.com/gx/en/services/advisory/deals/business-recoveryrestructuring/working-capitalopportunity/size.html.
  • 30. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Accounts Receivable • About 90% of industrial and wholesale sales are on credit, and 40% of retail sales are on account. • Dun & Bradstreet: only 13% of large U.S. companies pay invoices by the due date. • Remember: “A sale is not a sale until you collect the money.” • Accounts receivable goal: Collect your company’s cash as fast as you can.
  • 31. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Establish a Credit and Collection Policy • Screen credit customers carefully. • Establish a firm credit-granting policy. • Send invoices promptly. – Cycle billing • When an account becomes overdue, take action immediately.
  • 32. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Accelerating Accounts Receivable • Ensure that invoices are accurate and timely. • Include a description of the goods or services purchased. • Ensure that invoices match purchase orders or contracts. • Highlight the balance dues and due date. • Include contact information in case customers have questions. • Use a security agreement.
  • 33. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Accounts Payable • Stretch out payment times as long as possible without damaging your credit rating. • Verify all invoices before paying them. • Negotiate the best possible terms with your suppliers. • Be honest with creditors; avoid the “the check is in the mail” syndrome. • Schedule controllable cash disbursements to come due at different times.
  • 34. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Accounts Payable Patterns Figure 13.8 Accounts Payable Pattern Among Businesses by Size of Company Source: Based on data from Payment Study 2016, Dun & Bradstreet, 2016, p. 44.
  • 35. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Inventory • Monitor inventory closely; it can drain a company’s cash. • Avoid inventory “overbuying.” – It ties up valuable cash at a zero rate of return. • Arrange for inventory deliveries at the latest possible date. • Take advantage of discounts: – Quantity discounts – Cash discounts
  • 36. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. A Cash Discount Figure 13.10 A Cash Discount
  • 37. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Cost of Forgoing Cash Discounts Table 13.8 Cost of Forgoing Cash Discounts Cash Discount Terms Cost of Forgoing the Cash Discount (Annually) 2/10, net 30 37.25% 2/10, net 40 24.83% 3/10, net 30 56.44% 3/10, net 40 37.63%
  • 38. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Avoiding the Cash Crunch (1 of 4) • Barter – Consider bartering, exchanging goods and services for other goods and services, to conserve cash.  More than 500 barter exchanges operate across the United States.
  • 39. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Avoiding the Cash Crunch (2 of 4) • Trim overhead costs: – Ask for discounts and “freebies” – Conduct periodic expense audits – Lease rather than buy  Operating lease  Capital lease – Avoid nonessential cash outlays – Buy used or reconditioned equipment – Hire part-time employees and freelancers
  • 40. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Avoiding the Cash Crunch (3 of 4) • Outsource • Use e-mail rather than mail • Use credit cards for small purchases • Negotiate fixed loan payments to coincide with your company’s cash flow • Establish an internal security and control system • Develop a system to battle check fraud • Change shipping terms
  • 41. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Avoiding the Cash Crunch (4 of 4) • Start selling gift cards • Switch to zero-based budgeting • Be on the lookout for employee theft • Keep your business plan current • Build a cash cushion • Invest surplus cash – Money market account – Zero-balance account
  • 42. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Conclusion • “Cash is King” • Cash and profits are not the same. • Entrepreneurial success means operating a company “lean and mean.” – Trim wasteful expenditures. – Invest surplus funds. – Plan and manage cash flow.
  • 43. Copyright © 2019, 2016, 2014 Pearson Education, Inc. All Rights Reserved. Copyright

Notas del editor

  1. If this PowerPoint presentation contains mathematical equations, you may need to check that your computer has the following installed: 1) MathType Plugin 2) Math Player (free versions available) 3) NVDA Reader (free versions available)
  2. In this chapter, you will: 1. Explain the importance of cash management to a small company’s success. 2. Differentiate between cash and profits. 3. Describe the five steps in creating a cash budget.
  3. In addition, you will: 4. Describe fundamental principles involved in managing the “big three” of cash management: accounts receivable, accounts payable, and inventory. 5. Explain the techniques for avoiding a cash crunch in a small company.
  4. Cash is a four-letter word that has become a curse for many small businesses. Lack of this valuable asset has driven countless small companies into bankruptcy. More small businesses fail for lack of cash than for lack of profit. Unfortunately, many more firms will become failure statistics because their owners have neglected the principles of cash management that can spell the difference between success and failure.
  5. The valley of death is the time period during which start-up companies experience negative cash flow as they ramp up operations, build their customer bases, and become self-supporting.
  6. Since 2010, the percentage of small business owners who report that their companies’ cash flow is either somewhat or very poor has declined, while the percentage of owners who say their companies’ cash flow is either somewhat or very good has increased.
  7. Small business’s cash positions are just beginning to return to pre-recession levels.
  8. A business must have enough cash to meet its obligations, or it will be declared bankrupt.
  9. These are some signs of an impending cash flow crisis.
  10. The first step in managing cash more effectively is to understand the company’s cash flow cycle – the time lag between paying suppliers for merchandise or materials and receiving payment from customers after it sells the product or service.
  11. Small companies, especially those that buy from or sell to larger businesses, are finding that their cash flow cycles are growing longer as large companies have stretched their invoice payment times to suppliers and decreased their invoice collection times from customers to improve their cash flow.
  12. For their companies to survive, entrepreneurs must generate both profits and cash. As important as earning a profit is, a company’s survival also depends on its ability to generate positive cash flow.
  13. The need for a cash budget arises because in every business the cash flowing in is rarely in sync with the cash flowing out of the business.
  14. This figure shows the flow of cash through a typical small business.
  15. Creating a cash budget involves five basic steps.
  16. Many financial experts recommend that businesses build a cash reserve or contingency fund large enough to cover three to six months of operating expenses.
  17. For an established business, a sales forecast is based on past sales, but owners must be careful not to be excessively optimistic in projecting sales.
  18. Most businesses, from retailers and hotels to accounting firms and builders, have sales patterns that are “lumpy” and not evenly distributed throughout the year.
  19. This table provides an example of how one entrepreneur used marketing information to derive a sales forecast for his first year of operation.
  20. Sales constitute the primary source of cash receipts.
  21. Collecting accounts receivable promptly poses problems for many small companies.
  22. The key factor when forecasting disbursements for a cash budget is to record them in the month in which the owner will pay them, not when the business incurs the obligation to pay.
  23. Preparing a cash budget not only illustrates the flow of cash into and out of a small business but also allows the owner to anticipate cash shortages and cash surpluses.
  24. By planning cash needs ahead of time, a small business can achieve these benefits.
  25. The “big three” of cash management are accounts receivable, accounts payable, and inventory. These three variables are leading indicators of a company’s cash flow.
  26. This figure shows the cash conversion cycle for the typical small business.
  27. The first step in establishing a workable credit policy is to screen customers carefully before granting them credit. Unfortunately, many small businesses neglect to conduct any kind of credit investigation before selling to a new customer.
  28. The second element of the big three of cash management is accounts payable. The timing of payables is just as crucial to proper cash management as the timing of receivables, but the objective is exactly the opposite.
  29. This figure shows the accounts payable pattern for businesses by size.
  30. Although inventory is the largest investment for many businesses, entrepreneurs often manage it haphazardly, creating a severe strain on their companies’ cash flow. As a result, the typical small business has not only too much inventory but also too much of the wrong kind of inventory!
  31. In general, it is sound business practice to take advantage of cash discounts because a company incurs an implicit (opportunity) cost by forgoing a cash discount.
  32. This table summarizes the cost of forgoing cash discounts with different terms.
  33. Bartering, the exchange of goods and services for other goods and services rather than for cash, is an effective way to conserve cash.
  34. High overhead expenses can strain a small company’s cash supply to the breaking point, and simple cost-cutting measures can save big money. Operating a business efficiently improves its cash flow.
  35. Successful owners run their businesses “lean and mean.” Trimming wasteful expenditures, investing surplus funds, and carefully planning and managing the company’s cash flow enable them to compete effectively.