Managing Cash Flow

274 Planning Cash Flow
ACTUAL
PROJECTED
OCT NOV DEC JAN FEB MAR APR MAY JUN
Sales (actual
for first three
months; then
forecasted) 196 207 203 200 250 400 500 300 200
Beginning Cash
without
Borrowing Actual Actual Actual $100 $119 $ 94 $ (37) $(122) $ 33
NET CASH
FLOW— Month Actual Actual Actual ____ 19 ____ (25)____ (131) ____ (85) ____ 155 ____ 105
Ending Cash
without
Borrowing Actual Actual 100 119 94 (37) (122) 33 138
Borrowing
required Actual Actual Actual ____ 0 ____ 6 ____ 137 ____ 222 ____ 67 ____ 0
ENDING CASH
BALANCE Actual Actual Actual $119 ____
$100 ____
$100 ____
$100 ____
$100 ____
$138
____
Exhibit 8.4 Managing Cash Shortfalls ($$ in 000s)
Lowering sales volume may seem contraindicated in the instance of a cash shortfall.
However, cash flow typically improves, temporarily, during times of business
slowdowns touched off by recession or other causes. The reason is that during a
slowdown the business continues to collect receivables on the basis of prior higher
levels of activity but disburses cash on the basis of anticipated lower levels of
future activity (assuming it maintains good control over its expenditures). This
creates positive cash flow. Conversely, during growth periods the opposite happens—the
company collects on the basis of prior, lower levels of activity, and
spends money based on anticipated higher levels of future activity, thereby creating
a potential cash shortfall.
This apparent enigma can totally befuddle managers who do not understand
the differences between cash flow and profitability. All too many managers
believe that the solution to all the company’s cash flow and profitability problems
is more sales, while the truth is that growth is an expensive, cash
resource–intensive condition that requires careful management and detailed
planning to ensure ongoing viability of the business. The economic landscape is
littered with the corpses of fast-growing, profitable companies that have inadequately
managed their cash balances and have run out of money to pay their
bills. It is the lack of cash to pay bills that is the immediate and direct cause of
business failure, not lack of profits (even though lack of profits may be the root
cause of the lack of cash).