14 Cash: Lifeblood of the Business McGraw-Hill/Irwin  Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reser...
<ul><li>Importance of Money </li></ul><ul><li>What is money, and why is it so important? </li></ul><ul><li>Money : cash, c...
<ul><li>Money In / Money Out </li></ul><ul><li>Almost 2/3 of all small businesses experience money problems </li></ul><ul>...
<ul><li>The Cash-to-Cash Cycle </li></ul>Chapter 14 14-
<ul><li>The  cash-to-cash cycle  of a pushcart vendor is only a few hours; construction projects may take years to complet...
<ul><li>What is money:  U.S. Dallas Federal Reserve </li></ul><ul><ul><li>“ Money is a medium of exchange accepted by the ...
<ul><li>Two purposes of money : </li></ul><ul><ul><li>To make exchanges </li></ul></ul><ul><ul><li>To keep track of wealth...
<ul><li>Cash and Cash Equivalents </li></ul><ul><li>Cash : cash is money immediately available to be spent </li></ul><ul><...
<ul><li>Managing Cash Flow </li></ul><ul><li>Cash can come from only  three sources : </li></ul><ul><ul><li>Cash can be ob...
<ul><li>Example </li></ul><ul><li>How to Better Manage Your Cash Flow </li></ul><ul><li>Measuring cash flow </li></ul><ul>...
<ul><li>Company and bank cash balances : most cash is held as bank deposits </li></ul><ul><ul><li>First step  in managing ...
<ul><li>Company book balance includes : </li></ul><ul><ul><li>Records of all inflows of cash </li></ul></ul><ul><ul><li>Ca...
<ul><li>Bank ledger balance : bank’s accounting system for all recognized transactions that affect the account </li></ul><...
<ul><li>Overdraft : a negative balance in a depositor’s bank account </li></ul><ul><li>Float : describes the delay in move...
<ul><li>Reconciling bank balances with company book balances </li></ul><ul><ul><li>key is knowing how much cash is availab...
<ul><li>Two reasons why balances differ : </li></ul><ul><ul><li>Bank knows information about your account that you cannot ...
<ul><li>Two-step reconciliation process : </li></ul><ul><ul><li>Add (subtract) to the bank balance those things that you k...
<ul><li>Reconciliation serves four purposes : </li></ul><ul><ul><li>Estimate the bank’s available balance for the purpose ...
<ul><li>Forecasting sales receipts : sales forecast is the cash receipts forecast </li></ul><ul><li>Businesses whose custo...
<ul><li>If you provide credit to your customers, you will always  wait some period of time  for some of your money </li></...
<ul><li>Forecasting cash disbursements :   </li></ul><ul><ul><li>Estimates of expenses </li></ul></ul><ul><ul><li>Knowledg...
<ul><li>Pro forma balance sheet : </li></ul><ul><ul><li>Final step is to put everything together to create a complete set ...
<ul><li>Example </li></ul><ul><li>Managing Your Cash Flow </li></ul><ul><li>Cash-flow forecast will help you predict the a...
<ul><li>Preventing Cash Flow Problems </li></ul><ul><li>Best prevention is  attention  and  understanding   your business’...
<ul><li>Techniques to decrease cash outflows : </li></ul><ul><ul><li>Two factors  of cash outflows that must be controlled...
<ul><li>Several strategies that will provide savings in cash outflows : </li></ul><ul><ul><li>Trade discounts </li></ul></...
<ul><li>Controlling Cash Shortages </li></ul>Chapter 14 14-
<ul><li>In Review </li></ul><ul><li>Managing cash flows is the most important and most difficult task faced by owners and ...
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  • How much money is in your pocket? $10? How much money do you have in the bank? A little more? How much money does is available to your company? That’s a different story and the focus of this chapter.
  • The cash to cash cycle refers to the time between paying out and receiving in cash. A small vendor may pay for his merchandise and sell it, receiving payment, the same day. Other projects, such as construction, may not receive payment until the project is finished. Or it may be that periodic payments are arranged (such as monthly) but the initial payments out still leave the company strapped for cash.
  • Example How to Better Manage Your Cash Flow Measuring cash flow Prepare cash flow projections for next year, next quarter and, if you&apos;re on shaky ground, next week accurate cash flow projection can alert you to trouble well before it strikes Improving receivables Improve the speed with which you turn materials and supplies into products, inventory into receivables, and receivables into cash Managing Payables examine costs carefully to find places to cut or control them Surviving shortfalls key to managing cash shortfalls is to become aware of the problem as early and as accurately as possible
  • Your view of the money in your account may not always match the bank. You may write a check and assume that money is not in your account, whereas the bank doesn’t take the money out until the check actually clears. Likewise the bank may not make your deposits available to spend for several days after deposit. Thus your idea and the bank’s may widely differ.
  • An overdraft is dangerous for several reasons. It means you have overspent your account. The bank will charge you additional fees for the overdraft. Most banks will not make the check good so the vendor you wrote the check to will look negatively on the situation.
  • Reconciliation is important and easy as outlined on the next few slides.
  • Forecasting sales is an estimate of the money coming in. Unfortunately extending credit, or even accepting credit cards, delays the receipt of the money. Credit cards also take a percentage of each sale lower the amount of cash coming in. If a business accepts credit cards they can work with the bank to see when the money will ‘sweep’ into the account: either weekly or daily.
  • Extending credit, or agreeing to bill later, always presents risks. There is a chance a customer will not pay. While they can be turned over to collections, it is still money lost. Also, even when they do pay you don’t know whether it will be today, next week, or in six months. While owners can make an average estimation, it is only an estimation.
  • Estimating payments out is the other side of the equation. Most businesses can estimate monthly bills such as rent, payroll, utilities, insurance, etc… A cash schedule can be made so that you know when payments are to be expected and thus when you need to have the cash on hand.
  • Example Managing Your Cash Flow Cash-flow forecast will help you predict the amount of money that will be coming into and flowing out of your business Take these steps to ensure your new business will maintain its positive cash flow Know what to expect cash-flow forecast provides a rough estimate of how much business could be expected in receipts each month, cash disbursements might be, and cash on hand at the end of each month Predict and plan for the slow times cash-flow forecasts can help predict slow seasons Make projections for the future
  • Small businesses, especially those just getting started, need to control their cash expenditures. Using temp agencies to hire employees allows you more flexibility in reducing their hours. Buying inventory on consignment means you pay for it after you sell it and have that cash in hand. Barter is a trade of goods requiring no cash.
  • Chap014bus230

    1. 1. 14 Cash: Lifeblood of the Business McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
    2. 2. <ul><li>Importance of Money </li></ul><ul><li>What is money, and why is it so important? </li></ul><ul><li>Money : cash, cash equivalents, profits, and banking </li></ul><ul><li>Differences are important </li></ul><ul><ul><li>Represents the lifeblood of the business, and knowing how to use it can make the difference between boom and bankruptcy </li></ul></ul>Chapter 14 14-
    3. 3. <ul><li>Money In / Money Out </li></ul><ul><li>Almost 2/3 of all small businesses experience money problems </li></ul><ul><ul><li>1/5 of small business managers reported that cash flow is a continuing problem </li></ul></ul><ul><li>Three primary causes of cash flow problems : </li></ul><ul><ul><li>Difficulty collecting money due </li></ul></ul><ul><ul><li>Seasonal variation in sales </li></ul></ul><ul><ul><li>Unexpected decreases in sales </li></ul></ul>Chapter 14 14-
    4. 4. <ul><li>The Cash-to-Cash Cycle </li></ul>Chapter 14 14-
    5. 5. <ul><li>The cash-to-cash cycle of a pushcart vendor is only a few hours; construction projects may take years to complete </li></ul><ul><li>Many small businesses experience difficulty because: </li></ul><ul><ul><li>The mismatch in time between receiving and spending cash </li></ul></ul><ul><ul><li>Mismatch in time between size of payments received and size of payments to be made </li></ul></ul>Chapter 14 14-
    6. 6. <ul><li>What is money: U.S. Dallas Federal Reserve </li></ul><ul><ul><li>“ Money is a medium of exchange accepted by the community, meaning it’s what people buy things with and sell things for. Money provides a standard for measuring value, so that the worth of different goods and services can be compared. And lastly, money is a store of value that can be saved for later purchases.” </li></ul></ul>Chapter 14 14-
    7. 7. <ul><li>Two purposes of money : </li></ul><ul><ul><li>To make exchanges </li></ul></ul><ul><ul><li>To keep track of wealth </li></ul></ul><ul><li>Remember, a profit on your accounting spreadsheet or in your account book is not money in your hand </li></ul><ul><li>Money is a medium of exchange , store of value , and measure of wealth </li></ul>Chapter 14 14-
    8. 8. <ul><li>Cash and Cash Equivalents </li></ul><ul><li>Cash : cash is money immediately available to be spent </li></ul><ul><ul><li>Cash equivalents : assets that may be quickly converted to cash </li></ul></ul><ul><ul><li>Currency : bills and coins printed by governments to represent money </li></ul></ul><ul><ul><li>Demand deposits : money held in checking and savings accounts </li></ul></ul><ul><ul><li>Commercial paper : notes issued by credit-worthy corporations </li></ul></ul>Chapter 14 14-
    9. 9. <ul><li>Managing Cash Flow </li></ul><ul><li>Cash can come from only three sources : </li></ul><ul><ul><li>Cash can be obtained by selling products and services </li></ul></ul><ul><ul><li>Cash can be obtained from investments the business has made </li></ul></ul><ul><ul><li>Cash through financing </li></ul></ul>Chapter 14 14-
    10. 10. <ul><li>Example </li></ul><ul><li>How to Better Manage Your Cash Flow </li></ul><ul><li>Measuring cash flow </li></ul><ul><ul><li>Prepare cash flow projections for next year, next quarter and, if you're on shaky ground, next week </li></ul></ul><ul><ul><li>accurate cash flow projection can alert you to trouble well before it strikes </li></ul></ul><ul><li>Improving receivables </li></ul><ul><li>Managing Payables </li></ul><ul><li>Surviving shortfalls </li></ul>Chapter 14 <ul><ul><li>http://www.entrepreneur.com/money/moneymanagement/managingcashflow/article66008.html </li></ul></ul>14-
    11. 11. <ul><li>Company and bank cash balances : most cash is held as bank deposits </li></ul><ul><ul><li>First step in managing cash flows is understanding how yours and the bank’s views of cash flow differ </li></ul></ul><ul><ul><li>Company book balance : sum of company’s internal accounting record of all transactions that affect cash </li></ul></ul>Chapter 14 14-
    12. 12. <ul><li>Company book balance includes : </li></ul><ul><ul><li>Records of all inflows of cash </li></ul></ul><ul><ul><li>Cash from sales </li></ul></ul><ul><ul><li>Receipts on receivables </li></ul></ul><ul><ul><li>Checks received from customers </li></ul></ul><ul><ul><li>Deposits made directly to the bank through electronic transfers </li></ul></ul><ul><ul><li>Records of all outflows of cash </li></ul></ul><ul><ul><li>Checks written to pay for wages, salaries, inventory, services, taxes, and so on </li></ul></ul>Chapter 14 14-
    13. 13. <ul><li>Bank ledger balance : bank’s accounting system for all recognized transactions that affect the account </li></ul><ul><ul><li>Balance may vary because of delays in collecting deposits and delays in making cash transfers </li></ul></ul><ul><li>Bank available balance : actual cash value of the account </li></ul>Chapter 14 14-
    14. 14. <ul><li>Overdraft : a negative balance in a depositor’s bank account </li></ul><ul><li>Float : describes the delay in movement of money among depositors and banks </li></ul><ul><ul><li>Two primary causes : </li></ul></ul><ul><ul><ul><li>Delays in transferring money due to internal procedures ( availability float ) </li></ul></ul></ul><ul><ul><ul><li>Delays in delivering checks ( processing float ) </li></ul></ul></ul>Chapter 14 14-
    15. 15. <ul><li>Reconciling bank balances with company book balances </li></ul><ul><ul><li>key is knowing how much cash is available to you at the moment </li></ul></ul><ul><li>Process of reconciling bank balance and book balances is quite simple </li></ul>Chapter 14 14-
    16. 16. <ul><li>Two reasons why balances differ : </li></ul><ul><ul><li>Bank knows information about your account that you cannot know until the bank tells you </li></ul></ul><ul><ul><li>You know information about your account that the bank cannot know, because relevant transactions have not yet reached the bank </li></ul></ul>Chapter 14 14-
    17. 17. <ul><li>Two-step reconciliation process : </li></ul><ul><ul><li>Add (subtract) to the bank balance those things that you know about your account that the bank does not know </li></ul></ul><ul><ul><li>Add (subtract) to your book balance those things that the bank knows </li></ul></ul>Chapter 14 14-
    18. 18. <ul><li>Reconciliation serves four purposes : </li></ul><ul><ul><li>Estimate the bank’s available balance for the purpose of managing your cash flows </li></ul></ul><ul><ul><li>Identifies any mistakes that were made by either the bank or by your own bookkeeper </li></ul></ul><ul><ul><li>Checks the accuracy of both the bank and business records </li></ul></ul><ul><ul><li>Lets you know about items on the bank statement that would not otherwise be included in the business’s accounting records </li></ul></ul>Chapter 14 14-
    19. 19. <ul><li>Forecasting sales receipts : sales forecast is the cash receipts forecast </li></ul><ul><li>Businesses whose customers make heavy use of their credit cards can face serious cash drains </li></ul><ul><li>Many businesses have either relatively few large sales events or highly seasonal sales that complicate forecasting </li></ul>Chapter 14 14-
    20. 20. <ul><li>If you provide credit to your customers, you will always wait some period of time for some of your money </li></ul><ul><ul><li>You will also have some customers who never pay </li></ul></ul><ul><ul><li>You never know exactly when you will collect cash </li></ul></ul><ul><ul><li>Reasonable estimate of their amount and timing can be made </li></ul></ul>Chapter 14 14-
    21. 21. <ul><li>Forecasting cash disbursements : </li></ul><ul><ul><li>Estimates of expenses </li></ul></ul><ul><ul><li>Knowledge of your business’s payment patterns </li></ul></ul><ul><ul><li>Predict how much and when cash should be paid out </li></ul></ul><ul><ul><li>Need to know how much money we will have on the first day of the year to put together a cash budget for the first quarter </li></ul></ul>Chapter 14 14-
    22. 22. <ul><li>Pro forma balance sheet : </li></ul><ul><ul><li>Final step is to put everything together to create a complete set of pro forma financial statements that you can use for raising money, for evaluating your operations, and for managing your business </li></ul></ul><ul><ul><li>Comprehensive budgets : referred to as master budgets </li></ul></ul>Chapter 14 14-
    23. 23. <ul><li>Example </li></ul><ul><li>Managing Your Cash Flow </li></ul><ul><li>Cash-flow forecast will help you predict the amount of money that will be coming into and flowing out of your business </li></ul><ul><li>Take these steps to ensure your new business will maintain its positive cash flow </li></ul><ul><ul><li>Know what to expect </li></ul></ul><ul><ul><li>Predict and plan for the slow times </li></ul></ul><ul><ul><li>Make projections for the future </li></ul></ul>Chapter 14 <ul><ul><li>http://www.entrepreneur.com/magazine/teenstartups/2002/august/54176.html </li></ul></ul>14-
    24. 24. <ul><li>Preventing Cash Flow Problems </li></ul><ul><li>Best prevention is attention and understanding your business’s operations </li></ul><ul><ul><li>Maintain an accurate forecast of cash needs </li></ul></ul><ul><li>Techniques to increase cash flows </li></ul><ul><ul><li>Taking deposits and progress payments </li></ul></ul><ul><ul><li>Offering discounts for prompt payments </li></ul></ul><ul><ul><li>Asking for your money </li></ul></ul><ul><ul><li>Taking on noncore paying projects </li></ul></ul><ul><ul><li>Factoring receivables </li></ul></ul>Chapter 14 14-
    25. 25. <ul><li>Techniques to decrease cash outflows : </li></ul><ul><ul><li>Two factors of cash outflows that must be controlled: </li></ul></ul><ul><ul><ul><li>The amount of cash being paid out </li></ul></ul></ul><ul><ul><ul><li>The timing of cash being paid out </li></ul></ul></ul><ul><ul><li>Waste also affects cash outflow </li></ul></ul>Chapter 14 14-
    26. 26. <ul><li>Several strategies that will provide savings in cash outflows : </li></ul><ul><ul><li>Trade discounts </li></ul></ul><ul><ul><li>Non-cash employee incentives </li></ul></ul><ul><ul><li>Use of temporary agencies </li></ul></ul><ul><ul><li>Consignment </li></ul></ul><ul><ul><li>Barter </li></ul></ul><ul><ul><li>Control of the timing of paying out cash </li></ul></ul><ul><ul><li>Timing of purchases </li></ul></ul><ul><ul><li>Negotiation of terms with suppliers </li></ul></ul>Chapter 14 14-
    27. 27. <ul><li>Controlling Cash Shortages </li></ul>Chapter 14 14-
    28. 28. <ul><li>In Review </li></ul><ul><li>Managing cash flows is the most important and most difficult task faced by owners and managers of small businesses </li></ul><ul><li>Revenue and expenses are used to predict the amounts and timings of cash outflows primarily through the budgeting process </li></ul><ul><li>Reconcile both the bank balance for items that you know about but are unknown to the bank, and then include those items that are reported by the bank, such as their fees </li></ul>Chapter 14 14-

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