Key Concepts
• “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.
The Importance of Cash
“Everything is about cash – raising it,
conserving it, collecting it.”
Guy Kawasaki
The Importance of Cash
Most Common cause of business failure:
Cash Crisis!
Cash Management
• A business can be earning a profit and be forced to
close because it runs out of cash!
• American Express OPEN Small Business Monitor
study:
– 57% of small business owners
experience problems with cash flow.
– Their biggest cash flow concern is
the ability to pay bills on time.
Small Business Owner’s Rating of Their
Companies’ Cash Flow
Cash Management
• Cash management – 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.
The Cash Flow Cycle
Order
Goods
Receive
Goods
Day 1
Sell
Goods*
Pay
Invoice
15
14
Deliver
Goods
40
25
Send
Invoice
Customer
Pays**
280
218 221 230
178
3
9
50
Cash Flow Cycle = 240 days
*Based
on Average Inventory Turnover:
365 days
2.05 times/year
= 178 days
**Based on Average Collection Period:
365 days
7.31 times/year
= 50 days
Five Cash Management
Roles of an Entrepreneur
1. Cash Finder
2. Cash Planner
3. Cash Distributor
4. Cash Collector
5. Cash Conserver
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.
Cash Flow
Increase in Cash
Leakage
Cash
Accounts Receivable
Decrease in Cash
Accounts Payable
Cash Sales
Production/Cash Purchases
Inventory
Leakage
The 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.
Preparing a Cash Budget
1. Determine a Minimum Cash Balance
Determine a
Minimum Cash Balance
Remember Goldilocks, the Three Bears,
and the porridge:
– Not too much...
– Not too little...
– But a cash balance that's
just right ... for you!
Preparing a Cash Budget
(continued)
1. Determine a Minimum Cash Balance
2. Forecast Sales
Forecast Sales
• 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.
Forecast Sales
(continued)
“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.
Forecast Sales
Prepare three sales forecasts:
• Pessimistic
• Optimistic
• Most Likely
Sales Forecast for a Start-Up
Example:
Number of cars in trading zone
x Percent of imports
= Number of imported cars in trading zone
Number of imports in trading zone
x Average expenditure on repairs
= Total import repair sales potential
Total import repair sales potential
x Estimated market share
= Sales estimate
84,000
x 24%
20,160
20,160
x $485
$9,777,600
$9,777,600
x 9.9%
$967,982
Preparing a Cash Budget
(continued)
1. Determine a Minimum Cash Balance
2. Forecast Sales
3. Forecast Cash Receipts
Forecast Cash Receipts
• 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.
Probability of Collecting Accounts
Receivable
Preparing a Cash Budget
(continued)
1. Determine a Minimum Cash Balance
2. Forecast Sales
3. Forecast Cash Receipts
4. Forecast Cash Disbursements
Forecast Cash Disbursements
• 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.
Cash Flow Concerns among Small
Business Owners
Preparing a Cash Budget
(continued)
1. Determine a Minimum Cash Balance
2. Forecast Sales
3. Forecast Cash Receipts
4. Forecast Cash Disbursements
5. Estimate End-of-Month Cash Balance
Estimate
End-of-Month Balance
• Take Beginning Cash Balance ...
• Add Cash Receipts ...
• Subtract Cash Disbursements
• Result is Cash Surplus
or Cash Shortage
(Repay or Borrow?)
Benefits of Cash Management
• 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
• Finance seasonal business needs
Benefits of Cash Management
(continued)
• Develop a sound borrowing and repayment
program
• Develop a sound borrowing program
• Impress lenders and investors
• Provide funds for expansion
• Plan for investing surplus cash
The “Big Three”
of Cash Management
1. Accounts Receivable
2. Accounts Payable
3. Inventory
Accounts Receivable
• About 90% of industrial and wholesale sales are on
credit, and 40% of retail sales are on account.
• Survey of small companies across a variety of
industries found that 77% extend credit to their
customers.
• 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.
Beating the Cash Crisis
Accounts Receivable
• Establish a firm credit-granting policy.
– Screen credit customers carefully.
– Develop a system of collecting accounts.
– Send invoices promptly.
– When an account becomes overdue, take action
immediately.
– Add finance charges to overdue accounts (check the
law first!).
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.
Collecting Accounts Receivable
BLUNDER
INSTEAD
Delay making the call.
Call promptly when overdue.
Fail to ask clearly for payment.
Ask firmly, professionally, politely.
Sound Desperate.
Ask because it is owed.
Talking Tough.
Remain Polite.
Try to figure out their cash flow
problem.
Focus on what they owe you… not why
they are late.
Asking how much they can pay now.
Expect full payment. Take charge.
Talk after the close.
Shut up and get off the call.
Call unprepared.
Prepare in advance of calling.
Trust your memory.
Keep detailed notes.
Rely on your computer.
Get involved personally.
Beating the Cash Crisis
• Stretch out payment times as long as possible
without damaging your credit rating.
• Verify all invoices before paying them.
• Take advantage of cash discounts.
The Cost of Foregoing a Cash Discount
$1,000 invoice 2/10, net 30
$20
Amount
Day 0
$980
$1,000
10
30
20 days
R =
I
PxT
=
$20
$980 x 20/365
= 37.25%
Beating the Cash Crisis
Accounts Payable
• 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.
• Use credit cards wisely.
Beating the Cash Crisis
Inventory
• Monitor it closely; inventory 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.
• Negotiate quantity discounts with suppliers when
possible.
Avoiding the Cash Crunch
• Consider bartering, exchanging goods and
services for other goods and services, to conserve
cash.
• Trim overhead costs:
–
–
–
–
–
Ask for discounts and “freebies”
Periodically evaluate expenses
Lease rather than buy
Avoid nonessential cash outlays
Negotiate fixed loan payments
to coincide with your
company’s cash flow
Avoiding the Cash Crunch
(continued)
• Trim overhead costs:
–
–
–
–
–
–
–
–
Buy used equipment
Hire part-time employees and freelancers
Outsource nonessential activities
Establish an internal security and control system
Develop a system to battle check fraud
Change shipping terms
Use e-mail rather than mail
Use credit cards for small purchases
Avoiding the Cash Crunch
(continued)
• Start selling gift cards
• Switch to zero-based budgeting
• Be on the lookout for employee theft
• Keep your business plan current
• Invest surplus cash
• Build a cash cushion
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.