Managing Cash Flow
Cash Management
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The process of forecasting, collecting,
disbursing, investing, and planning for the
cash a company needs to operate
smoothly
Cash Flow Cycle
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Order goods
Receive goods
Pay invoice
Sell goods
Deliver goods
Send invoice
Customer pays
Total
14
25
178
3
9
50
240 days
Cash Flow
CASH SALES
CASH
ACCOUNTS RECEIVABLE
ACCOUNTS PAYABLE
PRODUCTION/CASH PURCHASES
INVENTORY
Cash Budget
A cash map showing the
amount and the
timing of cash
receipts and cash
disbursements on a
daily, weekly, or
monthly basis
Cash Budget
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Step 1
Determining an Adequate
Minimum Cash Balance
Step 2
Forecasting Sales (pessimistic,
most likely, optimistic)
Step 3
Forecasting Cash Receipts
Step 4
Forecasting Cash Disbursements
Step 5
Estimating the End-of-month
Cash Balance
Forecasting Sales for a Business
Start-up
Example
No. of cars in trading zone
84,000
% imported
24%
No. of imported cars in trading zone 20,160
Average expenditure in repairs
$485
Total repair sales potential
$9,777,600
Estimated share of market
9.9%
Sales estimate
$967,982
Causes of Cash Flow Problems in
Small Business
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Difficulty collecting A/R
Seasonal sales patterns
Unexpected variations in sales
Weak sales
29.7%
22.8%
15.4%
13.1%
Collecting Delinquent Accounts
No. of Months
Delinquent
1
2
3
6
9
12
24
% Probability
of Collection
93.8%
85.2%
73.6%
57.8%
42.8%
23.6%
13.6%
Big 3 of Cash Management
 Accounts
Receivable
collect early
 Accounts Payable
stretch payments
 Inventory
don’t tie up cash in
wrong inventory
Cash Flow Concerns
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Collecting A/R
Paying bills on time
Having enough cash
to attract new clients
Tracking cash flow
Meeting payroll
35%
26%
22%
11%
6%
Accounts Receivable
Credit and collection policy
 Screen customers before extending credit
 Write a firm credit policy/let customers
know
 Send invoices promptly, clearly and
accurately
 Encourage prompt payment
 Take immediate action when an account
falls overdue
Accounts Receivable
Encouraging prompt payment
 Clear, accurate, timely invoices
 Clear description and account number
 Prices and language that agree with the
price quotation on orders and contracts
 Highlighted balance due and terms
 Contact info
Accounts Receivable
Collection Blunders
 Delaying collection calls
 Failing to clearly ask for
payment
 Sounding desperate
 Talking tough
 Trying to find out the
customer’s problem
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Asking customers how
much they can pay
Continuing to talk after
getting a promise to pay
Calling not prepared
Trusting your memory
Letting the computer
control collection efforts
Accounts Receivable
Other Techniques to Accelerating A/R
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Use email or fax for orders and invoices
Send invoices as soon as goods are shipped
Highlight invoice due date and late payment penalties
Restrict credit until all bills are paid
Deposit daily
Closely monitor top 20% of customers who make 80% of
receivables
Ask for partial payment up front
Watch out for customers that are going bankrupt
Consider lockbox services
Track results of collection efforts
Consider a security agreement
Accounts Payable
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Verify all supplier invoices before paying
them
Stretch payment as far as practical
Take advantage of cash discounts
Get favorable credit terms
Work out payment terms
Use credit cards
Inventory
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Shed slow-moving inventory
Schedule delivery dates at the latest
possible
Get from fastest suppliers
Coping with Cash Crunch
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Investing personal funds
Postponing purchases
Obtaining line of credit
Using a credit card
Using a short-term loan
Leasing rather than purchasing
28%
18%
18%
12%
11%
4%
Avoiding the Cash Crunch
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Barter
Trim Overhead Costs
Sell gift cards
Switch to ZBB
Look out for employee theft
Keep business plan current
Invest surplus cash
Avoiding the Cash
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Ask for discounts or freebies
Periodically evaluate expenses
Lease, instead of buy
Avoid nonessential outlays
Negotiate to cash flow cycle
Buy used or reconditioned equipment
Outsource
Control employee advances or loans
Develop system for check fraud
Change shipping terms