Managing Cash Flow
- 1. Managing Cash Flow Presented by Laurice Hewitt Hewitt Business Consultants, LLC
- 2. Basic Financial Reports Balance Sheet - estimates the firm's worth on a given date; built on the accounting equation: Assets = Liabilities + Owner's Equity Income Statement - compares the firm's expenses against its revenue over a period of time to show its net income (or loss): Net Income = Sales Revenue - Expenses Statement of Cash Flows - shows the change in the firm's working capital over a period of time by listing the sources of funds and the uses of these funds.
- 3. Basic Financial Planning One-third of entrepreneurs run their companies without any kind of financial plan! Only 11 percent of small business owners analyze their companies’ financial statements.
- 4. Cash Management Young, growing companies are “cash sponges.” A business can be earning a profit and be forced to close because it runs out of cash! Cash management – forecasting, collecting, disbursing, investing, and planning for the cash a company needs to operate smoothly.
- 6. Cash Management Geneva Business Bank study: Greatest potential threat to cash flow occurs during rapid growth. Study: 68% of small businesses perform no cash flow analysis at all! First step: Understanding a company’s cash flow cycle – the time lag between paying suppliers for merchandise and receiving payment from customers.
- 7. Five Cash Management Roles of an Entrepreneur Cash Finder Cash Planner Cash Distributor Cash Collector Cash Conserver
- 8. The Cash Budget A “cash map,” showing 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. A helpful tool for visualizing the firm's cash receipts and cash disbursements and the resulting cash balance.
- 9. Preparing a Cash Budget Determine a Minimum Cash Balance Forecast Sales Forecast Cash Receipts Forecast Cash Disbursements Estimate End-of-Month Cash Balance
- 10. Remember Goldilocks, the Three Bears, and the porridge: Not too much... Not too little... but a cash balance that's just right ... for you! Determine a Minimum Cash Balance
- 11. The heart of the cash budget. Sales are ultimately transformed into cash receipts and cash disbursements. Prepare three sales forecasts: Most Likely Pessimistic Optimistic Forecast Sales
- 12. Record all cash receipts when actually received (i.e. the cash method of accounting). Determine the collection pattern for credit sales; then add cash sales. Forecast Cash Receipts
- 14. Forecast Cash Disbursements Key: Record cash disbursements when you will pay them , NOT when you incur the obligation to pay them.
- 15. 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. Forecast Cash Disbursements
- 16. Take Beginning Cash Balance... Add Cash Receipts... Subtract Cash Disbursements Result is Cash Surplus or Cash Shortage (Repay or Borrow?) Estimate End-of-Month Balance
- 17. Benefits of Cash Management Increase amount and speed of cash flowing in Reduce the amount and speed of cash flowing out Develop a sound borrowing and repayment program Impress lenders and investors Reduce borrowing costs by borrowing only when necessary
- 18. Benefits of Cash Management Take advantage of money-saving opportunities such as cash discounts Make the most efficient use of available cash Finance seasonal business needs Provide funds for expansion Plan for investing surplus cash
- 19. The "Big Three" of Cash Management Accounts Receivable Accounts Payable Inventory
- 20. About 90% of industrial and wholesale sales are on credit, and 40 percent of retail sales are on account. Survey of small companies across a variety of industries: 77% extend credit to their customers. Accounts Receivable
- 21. Remember: “A sale is not a sale until you collect the money.” The goal with accounts receivable is to collect your company’s cash as fast as you can. Accounts Receivable
- 22. Establish a firm credit-granting policy. Screen credit customers carefully. When an account becomes overdue, take action immediately . Add finance charges to overdue accounts (check the law first!). Develop a system of collecting accounts. Send invoices promptly. Beating the Cash Crisis Accounts Receivable
- 23. Accelerating Accounts Receivable Ask customers to fax or e-mail orders Send invoices when goods are shipped Highlight the due date on invoices Restrict customers’ credit until past-due bills are paid Deposit checks and credit card receipts daily
- 24. Accelerating Accounts Receivable Identify the top 20% of your customers and monitor them closely Ask customers for up-front payments Watch for signs that a customer may be about to declare bankruptcy Consider using a lockbox service Track the results of your company’s collection efforts
- 25. Stretch out payment times as long as possible without damaging your credit rating . Verify all invoices before paying them. Take advantage of cash discounts (e.g., “2/10, net 30”). Beating the Cash Crisis Accounts Receivable
- 26. 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. Beating the Cash Crisis Accounts Payable
- 27. Monitor it closely; it can drain a company's cash. Avoid inventory overbuying. It ties up valuable cash at a zero rate of return. Mark down items that aren’t selling. Schedule inventory deliveries at the latest possible date. Negotiate quantity discounts with suppliers when possible. Beating the Cash Crisis Inventory
- 28. Avoiding the Cash Crunch Consider bartering, exchanging goods and services for other goods and services, to conserve cash. Trim overhead costs. For example: Lease rather than buy Avoid nonessential cash outlays Negotiate fixed loan payments to coincide with your company’s cash flow
- 29. Trim overhead costs. For example: Buy used equipment Look for simple ways to cut costs Hire part-time employees and freelancers Develop an internal security system Avoiding the Cash Crunch (Continued)
- 30. Trim overhead costs. For example: Develop an internal security system Devise a method for fighting check fraud Change shipping terms Switch to zero-based budgeting Keep your business plan current Invest surplus cash Avoiding the Cash Crunch (Continued)