Lesson 10Managing Cash Flow

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Lesson 10-Managing Cash Flow
Introduction Think about your personal
expenses.  How do you know you  will have enough
money for your rent, car payment, entertainment,
etc.?
Put all your eggs in one basket and--WATCH THAT
BASKET"         .. .MarkTwain
Objective  Describe the  significance and
purpose of a cash flow projection and develop one
for a business venture. Develop a cash
management mindset and a strategy that fits the
needs of your business venture.
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Lecture Point One
      Management of your cash flow is, perhaps,
the most important financial issue on your
plate.  Knowing where and when you will need
money--and whether there is enough money supply
to cover those needs is the life-blood of your
organization.   Your focus here should be to
visualize the flow of cash like a faucet for cash
coming in and a drain for cash going out.  The
object is to increase the flow of the faucet and
reduce the flow of the drain.  If you are
successful at that, there will be an increasing
amount of cash in the sink, and that translates
into more solvency and profit. Cash management
can take place in countless ways.  Here is a
cash management checklist that should
stimulate actions you can do in your
business to assure faster inflows and
slower outflows. Your textbook has a very
nice presentation on actions you can do to
effectively manage cash flow in a business.  
To focus on those key items, please go to
Study Quiz 10.
In-box
Out-box
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Lecture Point Two
             The cash flow projection is the
tool you will use to develop your strategy for
the ensuing months' operations.  It will clarify
the flow of cash coming into and out of the
business.  Clearly, unless you are the
government, you must have money coming into the
business in order to have cash going out of your
business.  The cash flow projection will warn you
about the months that this is not likely to
happen, so you can begin planning early to
develop alternatives to either acquire more cash
or spend less. The worksheet functions much like
your checkbook.  Cash coming into your
organization are recognized at the moment they
enter the organization--just like your bank
recognizes a payroll deposit into your checking
account.  Cash paid-out is recognized at the
moment that checks are cashed against your
account.  If bills occur only once or four times
a year, that is how they are projected on the
cash flow--in the exact month they are paid.  In
this fashion, the business owner can get a clear
picture of how much cash will be on-hand during
any given month.
Annual Cash Needs
Jan. Feb. Mar. Apr. May Jun. Jul. Aug.
Sep. Oct. Nov. Dec.
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There are basically three sections to calculate
when developing your cash flow projection.  The
first is estimating cash inflows.  For this, you
obviously consider cash sales, and if you sell on
account (other than credit cards), you will have
receivables collected.  In some instances, you
might also have income from interest and/or the
sale of fixed assets.  These figures represent
your "cash available" each month. The second
(and largest for most) is where you identify cash
outflows.  Whenever a check is written, it
represents an outflow  rent, salaries,
inventory, utilities, etc.  Be sure that you
think through when you will logically spend these
amounts.  Some payments, for example insurance,
might occur every third month (quarterly).  Still
others might be once a year--like licenses. Just
remember, the cash is only counted until it
actually arrives, and in the same fashion, is
spent only when actually paid-out. When
identifying the monthly payments toward loan
balances, separate the principle portion from the
interest portion.  These projections can be
acquired by accessing an interest rate
calculator.  NOTE  when you reach the opening
page, then complete the appropriate blanks in the
"calculator" dialog box and click on "complete
amortization table".  This will provide a
projection of principle and interest payments
for each month of the loan span.  Note also that
the pull-down for the number of years has a
selection for "7".  This is the typical
loan-period for small business loans. 
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Finally, after you have totaled all your outgoing
cash payments, you calculate the difference
between cash inflows and cash outflows to obtain
"cash balance or deficiency".  It is very
possible that during your first month of
operation you will have much more outflow that
inflow (initial inventory purchases, equipment
purchases, etc.).  This will result in the need
for a cash infusion to the business.   This cash
infusion will come from one or both of two
potential sources  loans to the business or
equity deposits.  Most small business owners have
saved a significant amount of their startup
capital.  This is an equity deposit.  Other
equity deposits can come from partners or
corporate investors.  Borrowed funds from banks
or private individuals might be required to
complete the cash need to bring a business into
balance.  These borrowed funds are what you will
calculate using the "mortgage calculator" I
mentioned two paragraphs above. Once you have
included needed cash infusions through equity or
debt arrangements, you should have an ending cash
balance for the month.  This balance is carried
forward to the next month and becomes that
month's beginning cash balance to which is added
the cash sales, receivables, etc.  I have
attempted to provide a line-by-line guide for the
construction of a cash flow statement in this
Cash Flow Projection guide. Your cash flow is
similar in concept to a water faucet and drain
example. In order to keep a significant amount
of water in the sink, you must either restrict
the outflow of the water, or increase the inflow
of water from the faucet. So, once you get past
the first month draught, your focus will be on
balancing these inflows and outflows to maintain
a positive balance.
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For this lessons project, I have provided a
simple cashflow worksheet that will assist you in
the cash projection process.  Ive attempted to
automate it as much as possible, but .
Since the process is somewhat complicated, Ive
provided step-by-step instructions. Click here
to acquire the instructions. Then, click on the
link below.  It will open a dialog box that will
ask you where you want to save it.  Once you have
saved it to a convenient file, you can enter your
projected figures in the spaces provided under
each month of the year. Cash Flow Worksheet
NOTE If the link doesnt allow you to
download the worksheet to your computer, you may
need to go to the following link
http//www.overture.com/d/search/p/netscape/?Key
wordsvisualbasicrunPartnernetscapebox then
click on Visual Basic 6.0 SP5 Run-Time
Redistribution Pack (VBRun60sp5.exe) to download
the exe software that will allow your computer to
run Visual Basic.
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• Here are some step-by-step instructions that
  might be helpful
• Click on the link above to get to the worksheet.
• Select where you want to save the form in your
  computer (desktop works well)
• Enter the name of your company in the space
  provided on the form.
• Use pull-down menu to select desired month-end
  date.
• Enter beginning cash amount (if any) new
  businesses are zero.
• Use pull-down menu to identify income sources,
  and enter Jan. amounts.
• Click on Available Cash Bal. button to add-up
  cash inflows.
• Use pull-down menu to identify expense areas, and
  enter Jan. amounts.
• Click on Total Cash Outflows button to add-up
  cash outflows.
• 10. Click on Cash Position button to get
  difference between inflows and outflows.
• 11. If Cash Position is negative, enter
  contributions (equity or loans or both).
• 12. Click on Ending Cash Bal. button to get
  the month-end balance.
• Click on the Beginning Cash Bal. button (at top
  of form) to transfer Jan. end figure to beginning
  Feb. figure, and repeat steps 6 through 13 until
  you have reached Dec.
• NOTE You must click all 5 buttons in sequence
  (12 times) to be sure data columns have
  rolled-over and represent accurate end-of-year
  totals.
• 14. Click Print button (upper left-hand
  corner) to print the completed form.
• 15. To send the form to me, press the Prt Sc
  (print screen) button in the upper-right part of
  your keyboard to place it on your clipboard, then
  open your e-mail to me and paste it in the
  message portion (press control and V to do this).
• If you are not done inserting data into the form,
  by clicking Exit the contents of the form will
  be saved to the C-drive of your computer. To
  retrieve the data, go to the original form saved
  to your desktop (2 above), double-click on the
  icon-- when it appears, click Retrieve.

To Cash Flow Worksheet
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Cash Management Checklist Banking Make deposits
at least daily Use night deposit facilities Keep
bank balance positiveavoid service charges Put
excess cash to work in interest-bearing
account Accounts Receivable Bill for sales and
services promptly Develop and enforce
late-payment penalties Use COD terms for chronic
slow payers Use progressive billing for partial
deliveries Turn over delinquent accounts to
collection agencies Inventory Limit purchases
to those only needed by business Get cash
discounts for purchases Dispose of slow-moving
inventory Expenses Pay insurance and large
bills in installments Consider leasing to avoid
large cash outlays Buy advertising to take
advantage of media reductions Develop barter
arrangements for goods and services Evaluate
shipping to minimize freight costs