Managing Cash Flow

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Cash Flow Basics 13 minimizing the gap between cash outflow and cash inflow. This cash gap can be considered the number of days between when it pays for materials and services and when it receives payment for the sale of the product or service. The longer this gap, the more time the company is out of pocket for cash. The cash gap needs to be financed, preferably from prior sales. Otherwise, cash must come from outside sources with the attendant costs of borrowing or equity, which have a negative effect on profits. If the company is successful, ending cash will exceed starting cash by more than enough to cover the time value of the cash injection(s). The company cannot be in the business of selling to nonpaying customers or selling products that generate less cash than their costs. Furthermore, investing in accounts receivable, sales backlog, or inventory should be avoided since these cannot be spent or reinvested until they are converted back into cash. Inadequate cash is often the principal limiting factor in the growth of the business, and the company’s goal should be to accelerate the cash conversion process as much as possible. Effective cash management maximizes cash generation for the business. This means, in effect, generating positive cash flow by applying effective techniques for collecting cash due to the company, expending no more cash than necessary, and delaying (within limits) the payment of cash due others. For the business to survive, it must have cash when it needs it. In addition, a positive cash buffer provides a safety net against unforeseen business crises, emergencies, or management errors and allows the company to take advantage of opportunities that may arise. Sufficient cash availability is also necessary for the business to grow and survive. Businesses fail not from lack of growth or lack of profitability, but from lack of cash to pay the bills. Also keep in mind that an overinvestment in cash can impose opportunity costs on the business by loss of earnings on that “excess” cash that would be available from investment in profitable alternative opportunities. However, excess cash does not normally lead to serious business problems, while insufficient cash is always a problem. Effective cash management allows the company to control its cash and manage its business economically, efficiently, and effectively. In this way, the company can reduce business disruptions, operate in a smooth and efficient manner, and provide for ongoing growth and profitability. Understanding and managing cash flow is not nearly as difficult a process as it may at first seem. There are a finite number of places where cash comes from and where it goes. We are not dealing with an inordinately complex process. To show this, a schematic, “Flow of Funds in a Business,” is depicted in Exhibit 1.1. It illustrates that cash comes from only a limited number of business sources and is used for only a limited number of activities. Therefore, there are only a limited number of areas to which company management can look to find opportunities to generate more cash inflows or reduce cash outflows. This is not intended to oversimplify the cash flow management process, but it is necessary for management to understand that the process need not be made more complicated than necessary.
14 Understanding Cash Management Current Operations SHORT-TERM LONG-TERM Capital Investments Cash sales, receivable collections Wages material, expenses Purchase of new plant & equipment Sale of assets Federal, State and Local Governments Taxes FINANCIAL C A S H OPERATIONAL Matured investments, interest income, short-term borrowing New equity, borrowing Money Markets Interest payments, securities purchases, debt repayment Interest payments, dividends, debt repayments, equity repurchases Capital Markets Exhibit 1.1 Flow of Funds in a Business MANAGING CASH FLOW IS A MANAGEABLE ACTIVITY. Cash Flow Process Any business—manufacturing, service, financial, not-for-profit, government, and so on—begins with an infusion of cash. The fundamental operating cash flow process within the business then operates in a continuous loop of short-term asset transformation as shown in the “Cash Generation Cycle” in Exhibit 1.2.
Page 2 and 3: Managing Cash Flow An Operational F
Page 4 and 5: Contents About the Authors Acknowle
Page 6 and 7: ABOUT THE AUTHORS Rob Reider, CPA,
Page 8 and 9: About the Authors vii • Cash Flow
Page 10 and 11: INTRODUCTION CASH IS KING! Cash ava
Page 12 and 13: Why the Business Exists 3 • Custo
Page 14 and 15: Some Basic Business Principles 5
Page 16 and 17: Purpose of this Book 7 • Are sale
Page 18 and 19: CHAPTER 1 Understanding Cash Manage
Page 20 and 21: Understanding Cash Management 11 qu
Page 24 and 25: Cash Flow Basics 15 FROM CASH TO CA
Page 26 and 27: Cash Flow Basics 17 • There needs
Page 28 and 29: Cash Flow Basics 19 The main reason
Page 30 and 31: History, the Fed, and Float 21 HIST
Page 32 and 33: History, the Fed, and Float 23 •
Page 34 and 35: History, the Fed, and Float 25 vers
Page 36 and 37: History, the Fed, and Float 27 Rece
Page 38 and 39: Bank Issues and Concerns 29 • Che
Page 40 and 41: Bank Issues and Concerns 31 or neve
Page 42 and 43: Conclusion 33 affects its relations
Page 44 and 45: CHAPTER 2 Managing Cash Flow—Rece
Page 46 and 47: Using the Balance Sheet 37 Change 2
Page 48 and 49: Cash Receipts 39 which could be use
Page 50 and 51: Cash Receipts 41 Sales per Day Avg.
Page 52 and 53: Cash Receipts 43 happening—would
Page 54 and 55: Cash Receipts 45 Invoicing The star
Page 56 and 57: Cash Receipts 47 earmark those for
Page 58 and 59: Cash Receipts 49 We can adjust the
Page 60 and 61: Cash Receipts 51 Finance Charges CA
Page 62 and 63: Cash Receipts 53 Standard sized env
Page 64 and 65: Cash Receipts 55 PAC Issuing Instit
Page 66 and 67: Cash Receipts 57 duction of about $
Page 68 and 69: Cash Disbursements 59 Sequence of A
Page 70 and 71: Cash Disbursements 61 determine whe
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Cash Disbursements 63 this system t
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Cash Disbursements 65 Estimated Fun
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Conclusion 67 Local Office #1 Sales
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CHAPTER 3 Planning and Budgeting PL
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Relationship Between Planning and B
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Relationship Between Planning and B
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Strategies for Competitive Advantag
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Strategic Planning Process 77 EXTER
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Strategic Planning Process 79 Once
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Short-Term Planning 81 D. PLANNING
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Short-Term Planning 83 TOP MANAGEME
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Short-Term Planning 85 Segment miss
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Short-Term Planning 87 Planning mis
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Short-Term Planning 89 limited in n
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Short-Term Planning 91 achievements
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Short-Term Planning 93 Credit/Colle
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CHAPTER 4 Analyzing the Sales Funct
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Purpose of the Sales Function 97 a
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Purpose of the Sales Function 99 1.
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Purpose of the Sales Function 101 L
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Purpose of the Sales Function 103 b
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Purpose of the Sales Function 105
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Purpose of the Sales Function 107 b
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Purpose of the Sales Function 111 S
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Purpose of the Sales Function 113 1
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Purpose of the Sales Function 115 t
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Purpose of the Sales Function 117 1
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Purpose of the Sales Function 119 r
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CHAPTER 5 Cost Reduction Analysis P
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Benchmarking Strategies 125 BENCHMA
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Benchmarking Strategies 127 determi
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Benchmarking Strategies 129 The ben
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Benchmarking Strategies 131 Product
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Benchmarking Strategies 133 Sales F
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Benchmarking Strategies 135 so that
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Benchmarking Strategies 137 To this
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Benchmarking Strategies 139 • Wha
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Benchmarking Strategies 141 increas
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Benchmarking Strategies 143 no ince
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Benchmarking Strategies 145 to eval
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Benchmarking Strategies 147 Accordi
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Benchmarking Strategies 149 Number
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Benchmarking Strategies 151 • Pur
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Activity Based Costing Principles 1
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Conclusion 175 the costs to particu
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Looking at the Accounting Function
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Choosing What to Analyze 179 expert
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Choosing What to Analyze 181 1. Def
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Identifying Goals and Basic Busines
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Financial Reporting 185 2. Accounts
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Financial Reporting 187 ASSETS Cash
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Compiling the Data 189 1. Organizat
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Compiling the Data 191 h. What is y
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Analyzing the Data 193 1. Organizat
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Analyzing the Data 195 e. Do you au
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Analyzing the Data 197 c. Can you p
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Organizational Issues 199 Controlle
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Budget Analysis 201 Budget Actual C
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Analysis of Functional Costs 203
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Analysis of Functional Costs 205 La
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Analysis of Accounting Operations 2
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Analysis of Accounting Operations 2
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Activity-Based Costing Applications
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Developing Recommendations 213 •
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Specific Recommendations 215 7. Per
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Specific Recommendations 217 ager a
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Specific Recommendations 219 figure
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Specific Recommendations 221 • Gr
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Specific Recommendations 223 • Sa
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Specific Recommendations 225 Curren
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Specific Recommendations 229 Based
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Organization Recommendations 233
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Other Areas for Review 235 • The
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Conclusion 237 must change its beli
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CHAPTER 7 Investing, Financing, and
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Investing Excess Cash 241 puts upwa
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Investing Excess Cash 243 Instrumen
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Investing Excess Cash 245 • Depre
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Investing Excess Cash 247 Cash Outf
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Investing Excess Cash 249 Investmen
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Borrowing for Cash Shortfalls 251 t
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Borrowing for Cash Shortfalls 253 m
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Borrowing for Cash Shortfalls 255 t
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Borrowing for Cash Shortfalls 257 r
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Borrowing for Cash Shortfalls 259 I
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Borrowing for Cash Shortfalls 261 A
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CHAPTER 8 Planning Cash Flow MANAGI
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Cash Flow Planning 265 or more futu
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Cash Flow Planning 267 Cash Budgeti
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Cash Flow Planning 269 ACTUAL PROJE
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Cash Flow Planning 275 THE MORE VOL
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Managing Cash Balances 277 on its u
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Cash Planning Approaches 279 Dealin
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Cash Planning Approaches 281 Cash f
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Conclusion 283 Cash flows from oper
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CHAPTER 9 Controlling and Analyzing
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Cash Flow Projections: Methodology
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Cash Flow Reporting and Controls 29
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Interpretation and Analysis of Cash
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AFTERWORD The materials in this boo
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APPENDIX A Case Study: Managing Cas
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Jack B. Nimble Company 327 ($$ in 0
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Jack B. Nimble Company 329 ABC Mach
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Jan Feb Mar Apr May Jun Jul Aug Sep
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Cash Forecast Information 333 him,
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Jan Feb Mar Apr May Jun Jul Aug Sep
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Jack B. Nimble Company Suggested So
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Jack B. Nimble Company Suggested So
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APPENDIX B Cash Conservation Checkl
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Liabilities and Equity 343 ASSETS Y
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Income and Expenses 345 INCOME AND
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Index A ABC, see Activity based cos
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Index 349 traditional, 159-161 unit
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Index 351 P Payables, 16, 59 Paymen
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Managing Cash Flow

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