Chapter 8: Managing Cash Flow
Objectives |
|
Upon completion of this chapter, you will be able to:
- Explain the importance of cash management to a small business's success.
- Differentiate between cash and profits.
- Understand the five steps in creating a cash budget and use them to create a
cash budget.
- Describe fundamental principles involved in managing the "Big Three" of cash
management: accounts receivable, accounts payable, and inventory.
- Explain the techniques for avoiding a cash crunch in a small company.
Chapter 8: Managing Cash Flow
Chapter Overview
|
|
- Explain the importance of cash management to a small business's
success.
- Cash is the most important but least productive asset the small business
has. The manager must maintain enough cash to meet the firm's normal
requirements (plus a reserve for emergencies) without retaining excessively
large, unproductive cash balances.
- Without adequate cash, a small business will fail.
- Differentiate between cash and profits.
- Cash and profits are not the same. More businesses fail for lack of
cash than for lack of profits.
- Profits, the difference between total revenue and total expenses, are an
accounting concept. Cash flow represents the flow of actual cash (the only thing
businesses can use to pay bills) through a business in a continuous cycle. A
business can be earning a profit and be forced out of business because it runs
out of cash.
- Understand the five steps in creating a cash budget and use them to
create a cash budget.
- The cash budgeting procedure outlined in this chapter tracks the flow of
cash through the business and enables the owner to project cash surpluses and
cash deficits at specific intervals.
- The five steps in creating a cash budget are as follows: forecasting sales,
forecasting cash receipts, forecasting cash disbursements, and determining the
end-of-month cash balance.
- Describe fundamental principles involved in managing the "Big Three"
of cash management: accounts receivable, accounts payable, and inventory.
- Controlling accounts receivable requires business owners to establish clear,
firm credit and collection policies and to screen customers before
granting them credit. Sending invoices promptly and acting on past-due accounts
quickly also improve cash flow. The goal is to collect cash from receivables as
quickly as possible.
- When managing accounts payable, a manager's goal is to stretch out payables
as long a possible without damaging the company's credit rating. Other
techniques include: verifying invoices before paying them, taking advantage of
cash discounts, and negotiating the best possible credit terms.
- Inventory frequently causes cash headaches for small business managers.
Excess inventory earns a zero rate of return and ties up a company's cash
unnecessarily. Owners must watch for stale merchandise.
- Explain the techniques for avoiding a cash crunch in a small company.
- Trimming overhead costs by bartering, leasing assets, avoiding nonessential
outlays, using zero-based budgeting, and implementing an internal control system
boost a firm's cash flow position.
- Also, investing surplus cash maximizes the firm's earning power. The primary
criteria for investing surplus cash are security and liquidity.
Chapter 8: The Foundations of
Entrepreneurship
Small Business
Assignments |
|
Answer all of the following questions:
1. Why must you concentrate on effective cash flow management?
2. Explain the difference between cash and profit
3. Outline the steps involved in developing a cash budget.
4. What are the "big three" of cash management? What effect do
they have on a company's cashflow?
5. Discuss how you will manage your businesses receivables, payables
and inventory
6. What steps can entrepreneurs take to conserve the cash within their
companies?
Appendix to complete: Financial Plan
Chapter 8: Managing Cash Flow
Small Business Links
|
|