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Ch. 12 Managing Cash Flow

by: Alora Lornklang

Ch. 12 Managing Cash Flow MGMT 3850

Alora Lornklang
GPA 3.5

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About this Document

These notes will cover the learning objectives and vocabulary from chapter 12 of the textbook.
Foundations of Entrepreneurship
Brandi Everett
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This 3 page Class Notes was uploaded by Alora Lornklang on Saturday April 9, 2016. The Class Notes belongs to MGMT 3850 at University of North Texas taught by Brandi Everett in Spring 2016. Since its upload, it has received 26 views. For similar materials see Foundations of Entrepreneurship in Entrepreneurship at University of North Texas.

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Date Created: 04/09/16
MGMT 3850 Foundations of Entrepreneurship Ch. 12: Managing Cash Flow  Valley of death o The time period during which start­up companies experience negative  cash flows as they ramp up operations, build their customer bases, and  become self­supporting.  LO1: Explain the importance of cash management to a small company’s success.  Cash is the most important but least productive asset the small business has. An  entrepreneur must maintain enough cash to meet the company’s normal  requirements without retaining excessively large, unproductive cash balances.   Without adequate cash, a small business will fail.   Cash management o The process of forecasting, collecting, disbursing, investing, and planning  for the cash a company needs to operate smoothly.   Cash flow cycle o The time lag between paying suppliers for merchandise or materials and  receiving payment from customers.   Once entrepreneurs understand their companies’ cash flow cycle, the next step in  effective cash management is to analyze it, looking for ways to reduce its length.   Business owners should calculate their cash flow cycles whenever they prepare  their financial statements.  LO2: 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 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.   Cash flow o A method of tracking a company’s liquidity and its ability to pay its bills  and other financial obligations on time by tracking the flow of cash into  and out of the business over a period of time.  LO3: Understand the five steps in creating 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.   Cash budget o A “cash map” showing the amount and the timing of cash receipts and  cash disbursements on a daily, weekly, or monthly basis.   Step 1: Determining an Adequate Minimum Cash Balance  Step 2: Forecasting Sales  Step 3: Forecasting Cash Receipts   Step 4: Forecasting cash disbursements  Step 5: Estimating the end­of­month cash balance   Electronic (Automated Clearing House) collections o A bank service that allows businesses to deduct automatically invoice  amounts from customers’ accounts and deposit them into the seller’s  account within 24 hours.   Remote Deposit o A bank service that allows businesses to scan customers’ checks and  deposit them from anywhere using a portable scanner, a computer, and an  Internet connection.  LO4: 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 past­due 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 as 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.   Cash Conversion Cycle o A measure of the length of time required to convert inventory and  accounts payable into sales and accounts receivable and finally back into  cash o Equal days’ inventory outstanding + days’ sales outstanding ­days’  payable outstanding   Cycle Billing o A method in which a company bills a portion of its credit customers each  day of the month to smooth out uneven cash receipts  Security Agreement o A contract in which a business selling an asset on credit gets a security  interest in that assets (the collateral), protecting its legal rights in case the  buyer fails to pay  Quantity discounts o Discounts that give businesses a price break when they order large  quantities of merchandise and supplies. They exist in two forms:  cumulative and noncumulative  Cash discounts  o Discounts offered to customers as an incentive to pay for merchandise  promptly  LO5: Explain the techniques for avoiding a cash crunch in a small company.  Key strategies include: trimming overhead costs by bartering: leasing assets rather than buying them; avoiding nonessential outlays; buying used equipment; hiring  part­time employees; negotiating fixed payments to coincide with a company’s  cash flow cycle; implementing an internal control system boost a firm’s cash flow position; developing a system to battle check fraud; selling giftcards; using zero­ based budgeting; being on the lookout for shoplifting and employee theft;  building a cash cushion; and keeping the business plan current.   In addition, investing surplus cash maximizes the firm’s earning power. The  primary criteria for investing surplus cash are security and liquidity.  Bartering o The exchange of goods and services for other goods and services rather  than for cash.   Operating lease o A lease at the end of which a company turns the equipment back to the  leasing company and has no further obligation.   Capital lease o A lease at the end of which a company may exercise an option to purchase the equipment, usually for a nominal sum.   Money market account  o An interest­bearing account that allow depositors to write checks without  tying up their money for a specific period of time.   Zero­balance account (ZBA) o A checking account that never has any funds in it. A company keeps its  money in an interest­bearing master account tied to the ZBA, the bank  withdraws enough money from the master account to cover it.   Sweep account  o A checking account that automatically sweeps all funds in a company’s  checking account above a predetermined minimum into an interest­bearing account. 


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