Cash is King
Teaching
cash flow
management
Greg Malkin
Director, Entrepreneur Institute
216-831-2200 x7362 gmalkin@us.edu
Syllabus
3 week unit plan
Profit versus Cashflow


Profit = Revenues - Expenses
Cashflow = Deposits into and
withdrawals from our bank
account.
Profit versus Cashflow


Matching = match revenue &
expenses in the same period to
determine profit.
Timing = Cashflow does not
necessarily match the recognition
of revenue and expenses.
The Cash Management Process




Estimate receipts (cash inflows)
Plan expenditures (cash outflows)
Limit spending to budget
(cash control)
Compare budgeted to actual
cashflows (evaluation)
Cash Management Example
Events
Purchase $1,000 of product in September with net 30 credit
Pay for product from supplier in October
Gross margin is 50%
Pay monthly salaries of $200
Product sales
Sept
Oct
Nov
Cash
250
500
250
Credit
250
500
250
Total sales
500
1000
500
Aug
Sept
Oct
Nov
Dec
0
0
50
-400
150
Cash sales
A/R
Loan
250
0
500
250
250
500
0
250
A/P
Payroll
0
-200
-1000
-200
0
-200
0
-200
Ending
50
-400
150
200
0
50
-400
150
200
0
A/R
Total Assets
0
1000
750
250
1050
750
0
250
500
350
250
0
0
250
400
0
0
0
0
200
Liabilities
Note Payable
A/P
1000
0
0
0
50
350
400
200
500
250
250
200
50
Sept-Dec
2000
1000
1000
800
200
Cash Flow
Starting
Cash in
Cash Out
Net cash
B/S
Cash
Inventory
Beg
Purchase
End
Equity
I/S
Revenue
COGS
Gross Profit
Expenses
Net Profit
500
250
250
200
50
1000
500
500
200
300
Homework Assignment
Case Study
Carrie Snowblower
Carrie’s Snowblowers
(Q4 Income Statement)
Fourth Quarter Income Statement, Carrie Company
Sales
2,200 units x $200
$440,000
Cost of Sales
2,200 units x $100
220,000
Gross margin
220,000
Less:
SG&A
Cash and noncash
Interest
payable
1% per month on ending balance
Net income
131,000
3,311
$ 85,689
Will the company have to borrow money even though it is so profitable?
Carrie’s Snowblowers


(Cash Receipts)
30% of all sales are for cash, 60% of receivables are collected in the month following the
sale, 35% are collected two months after the purchase, and the rest become bad debts.
There are no accounts receivable outstanding at the beginning of October.
You will need to calculate the budgeted cashflows from sales for January, February and
March.
Cash collections for = 30% of the
the month.
current sales
+ 60% of
previous month’s
credit sales
+ 35% of two
month’s previous
credit sales
Cash collections for = 30% x
December =
$300,000 =
$141,800
$90,000
+ 60% x (70% x
$100,000) =
$42,000
+ 35% x (70% x
$40,000 =
$9,800
Cash collections for = 30% x
January =
$100,000 =
$180,500
$30,000
+ 60% x (70% x
$300,000) =
$126,000
+35% x (70% x
$100,000) =
$24,500
Cash collections for
February = ______
Cash collections for
March = ________
Carrie’s Snowblowers
(Inventory purchases)
Required purchases
during the current
month
Sales for the
current
month
+ Ending
inventory
+ (120% x next
month’s sales
Purchases for October
= 600 units
Purchases for
November = 1,700
units
Purchases for
December = ________
Purchases for January
= ___________
Purchases for February
= ___________
= 200 units
+ 1.2 x 500
units
+ 1,800 units
Purchases for March
= ___________
= 500 units
- Beginning
Inventory
- (120% x
current month’s
sales
- 200 units
- 600 units
Carrie’s Snowblowers
(Purchases payments)
Cost of goods is $100 per unit. Inventories are bought on credit. 45% paid in the month
of purchase and 55% paid in the following month. Accounts payable at the beginning of
October were $15K.
Purchases = 45% x current month’ purchases + 55% x last month’s
Current month
October purchases
= $42,000
November purchases
= $109,500
December purchases
= $107,000
January purchases
= ____________
February purchases
= ____________
March purchases
= ____________
Last month
= .45 x 600 units x
$100
+ $15,000 (given)
= .45 x 1,700 units x
$100
+ .55 x 600 units x $100
= .45 x 300 units x
$100
+ .55 x 1,700 units x $100
Carrie’s Snowblowers
(Q4 Cash Flow)
Cash Budget for Carrie Company — 4th Quarter
October
Beginning Cash Balance
November December 4th Quarter
$40,000
$20,000
$ 20,000
$ 40,000
Sales and Receivables
$12,000
$46,800
$141,800
$200,600
Total cash available
$52,000
$66,800
$161,800
$240,600
$42,000
$109,500
$107,000
$258,500
26,000
27,500
32,500
86,000
20,000
5,000
25,000
Cash collections:
Less cash disbursements:
Purchases
SG&A (w/o interest)
Capital equipment
Total cash
requirements
$68,000
$157,000
$144,500
$369,500
Excess (Deficit)
(16,000)
(90,200)
17,300
(128,900)
Borrowings (Repayments)
$36,000
$110,200
$ 2,700
$148,900
Ending Balance
$20,000
$ 20,000
$ 20,000
$ 20,000
Carrie’s Snowblowers Quiz
Name: ___________
First Quarter Income Statement, Carrie Company
Sales
units x $200
Cost of Sales
units x $100
Gross margin
Less:
SG&A
Cash and noncash
Interest
payable
1% per month on end of month
loan balance
Net income
Assume interest is paid on the balance at the end of the month. (Example: if month
ending loan balance is $8,500 then interest payment that month will be $85.
Carrie’s Snowblowers Quiz
Name: ___________
Cash Budget for Carrie Company — 1th Quarter
January
Beginning Cash Balance
Cash collections:
Sales and Receivables
Total cash available
Less cash disbursements:
Purchases
SG&A (w/o interest)
Capital equipment
Total cash
requirements
Excess (Deficit)
Borrowings (Repayments)
Ending Balance
$20,000
February
March
1th Quarter
Balance Sheet
Current Assets
Cash
Receivables
Inventories
Prepaid Expenses
Total current assets
Fixed Assets
Less Accumulated Depreciation
Net fixed assets
Other Assets
Total Assets
Liabilities
Accounts Payable
Notes Payable - bank
6/30/86 - Q1
$
100,000.00
$
507,000.00
$
2,808,000.00
$
241,000.00
$
3,656,000.00
$
3,570,000.00
$
1,398,000.00
$
2,172,000.00
$
201,000.00
$
6,029,000.00
$
1,849,000.00
$
2,176,000.00
9/30/86 - Q2
$
100,000.00
$
4,580,000.00
$
1,690,000.00
$
294,000.00
$
6,664,000.00
$
3,808,000.00
$
1,564,000.00
$
2,244,000.00
$
247,000.00
$
9,155,000.00
$
1,717,000.00
$
3,727,000.00
12/31/86 - Q3
$
100,000.00
$
4,739,000.00
$
1,166,000.00
$
198,000.00
$
6,203,000.00
$
3,987,000.00
$
1,743,000.00
$
2,244,000.00
$
283,000.00
$
8,730,000.00
$
1,755,000.00
$
3,041,000.00
$
980,000.00
$
5,005,000.00
$
1,060,000.00
$
6,504,000.00
$
207,000.00
$
5,003,000.00
3/31/87 - Q4
$
100,000
$
1,741,000
$
1,869,000
$
283,000
$
3,993,000
$
4,288,000
$
1,938,000
$
2,350,000
$
302,000
$
6,645,000
$
1,664,000
$
1,650,000
$
$
189,000
$
3,503,000
$
5,005,000.00
$
6,504,000.00
$
5,003,000.00
$
3,503,000
$
1,249,000.00
$
105,000.00
$
(330,000.00)
$
1,249,000.00
$
105,000.00
$
1,297,000.00
$
1,249,000.00
$
105,000.00
$
2,373,000.00
$
1,249,000
$
105,000
$
1,788,000
$
1,024,000.00
$
2,651,000.00
$
3,727,000.00
$
3,142,000
Income tax payable
Current installment - long-term debt
Total current liability
Long Term Debt
Term Loan
Total Liability
Stockholder's Equity
Common Stock
Additional capital
Retained Earnings
Total stockholder's
Equity
6/30/86 - Q1
9/30/86 - Q2
12/31/86 - Q3
3/31/87 - Q4 Year
end
Cash Flow Analysis
Starting Cash Balance
At least $100,000
156,000
100,000
100,000
100,000
Cash In
Receipts
1,487,000
1,764,000
4,572,000
3,800,000
Cash Out
Operating Expenses
1,928,000
2,967,000
2,698,000
2,022,000
Interest
67,000
110,000
168,000
86,000
Capital expenditures
177,000
238,000
179,000
301,000
Total cash out
2,172,000
3,315,000
3,886,000
2,409,000
Net cash available
(529,000)
(1,451,000)
786,000
1,491,000
End of month minimum
cash balance
100,000
100,000
100,000
100,000
(629,000)
(1,551,000)
686,000
1,391,000
Loan required to reach
minimum cash balance
Cash available to payoff
loan balance
Loan balance
Starting balance =
$1,547,000
(2,176,000)
(3,727,000)
(3,041,000)
(1,650,000)
Collateral
80% of receivables
406,000
3,664,000
3,791,000
1,393,000
70% of Inventory
1,966,000
1,183,000
816,000
1,308,000
Total collateral
2,372,000
4,847,000
4,607,000
2,701,000
Answer Section
Units
Sales Budget
June
FORMULA1
Dollars
FORMULA2
Unit Purchases Budget
Desired ending inventory
Current month's unit sales
Total units needed
Beginning inventory
Purchases (units)
June
FORMULA3
FORMULA4
FORMULA5
FORMULA6
FORMULA7
Purchases (dollars)
FORMULA8
Cash Budget
Cash balance, beginning
Cash receipts:
Collections from customers:
From April sales
From May sales
From June sales
From July sales
From August sales
Total cash available
Cash disbursements:
Merchandise
Variable expenses
Fixed expenses
Interest paid
Total disbursements
Cash balance before financing
Less: Desired ending balance
Excess (deficit) of cash over needs
Financing
Borrowing
Repayment
Total effects of financing
Cash balance, ending
July
August
0
0
0
0
July
June
$8,000
FORMULA9
FORMULA10
FORMULA12
August
0
0
0
0
0
0
0
0
0
0
$0
$0
July
August
$0
$0
0
0
FORMULA11
$0
$0
0
0
0
$0
0
$0
$0
0
$0
$0
0
0
0
$0
$0
0
$0
$0
0
0
0
$0
$0
0
$0
$0
0
$0
$0
$0
0
$0
$0
$0
0
$0
$0
FORMULA13
FORMULA14
FORMULA15
Forecasted Income Statement
For Quarter Ended August 31, 2001
Sales
Cost of goods sold
Gross profit
Expenses:
Variable expenses
Fixed expenses
Depreciation expense
Interest expense
Total expenses
Net income
FORMULA16
FORMULA17
FORMULA18
FORMULA19
FORMULA20
FORMULA21
FORMULA22
$0
$0
Forecasted Balance Sheet
August 31, 2001
Assets:
Cash
Accounts receivable
Merchandise inventory
Fixed assets (net)
Total assets
FORMULA23
FORMULA24
FORMULA25
FORMULA26
$0
Liabilities & equity:
Accounts payable
Loans payable
Owner's equity
Total liabilities & equity
FORMULA27
0
FORMULA28
$0
Final Assessment
Resources
Hanson Ski Products - Harvard Case Study
Case: 9-187-038 Teaching notes: 5-191-031
http://hbsp.harvard.edu/
Excel for Managerial Accounting
Gaylord Smith
ISBN:978-0324016246
Management Accounting A Road of Discovery
James Mackey & Michael Thomas
ISBN: 0-538-87189
Managerial Accounting
Bill Lee
ISBN: 0-538-43173-3
All curriculum materials except Harvard case study
Consortium Conference web site