Cash Flows

It is important that companies develop both long term and short term cash management plans. Cash is the lifeblood of a company.

A company can not operate without cash. Cash is needed to operate on a day to day basis.

Cash is on of the most valuable assets in the company

A full and complete understanding of cash helps a company to identify possible deficits as well as plan for the investment of excess cash (Capital Planning).

Please keep in mind: Understanding the cash position does not necessarily help a company to improve its cash position. There are other issues that need to be addressed:

-Seasonality

-Economy

-Accuracy of the other plans (especially sales plan

and expense plans)

-Quality

The cash flow budget:

1. Give the probable cash position at the end of the

period

2. Identify cash excesses or shortages

3. Establish the need for financing/investing idle cash

4. Coordinate cash with expenses

5. Establish a control system The monitoring of the cash budget is primarily the responsibility of the treasurer (or finance department). This is a staff position.

This is a source of conflict between the line and staff.

Time frame with cash flows:

1. Long term - The long term cash position is imperative to

a successful company. i.e. Planning for new products,

new customers, new facilities, new capital items, etc.

2. Short term and immediate- Tactical plan needs to be reviewed and assessed (and paid for).

Managers also need to review cash for the purposes of controlling operations.

Approaches used to develop a cash position

1. Cash Receipts and cash disbursements

Cash inflows arise from sales, collection of A/R, sale of capital assets, interest on investments, etc.

Cash sales generate immediate cash

Credit sales causes a lag

Collection problems- The Sales manger or finance department must determine the level of credit that is extended. This is based on the amounts of cash that are needed vs. the paying experience of the customer.

Cash is used for:

1. Direct labor

2. Materials

3. Overhead

4. Dividends

5. Capital additions

The company should take all cash discounts (on the last day

of the period)

Control of the cash position:

Cash flow is subject to:

1. Unexpected events

(Union problems, supplier problems, etc)

2. Lack of cash control

3. Miscellaneous factors that might effect cash

(Ex; Tax increases)

Management can do the following things to improve their cash position:

1. Increase efforts to improve receivables (Offer discounts,

extend less credit, etc)

2. Reduce cash expenses

3. Defer capital expenditure

4. Defer some liabilities/slow down payments.

There are several vendors that can be postponed

(Ex. utilities, property taxes) These expenses usually can be paid late with no penalty.

The key to slowing down payments is letting your

vendors know about your problems.

You must keep important vendors happy.

5. Reduce inventories (This is an issue with customer service.

6. Continuous evaluation (almost day to day)

7. No credit

8. Incentives to pay early - These need to be evaluated.

Do they work? Is the incentive too much or too little?

9 Credit screening. If a customer falls beyond the

pay period, call them. Sometimes they forget; sometimes they have problems; sometimes they have product issues. Talking to the customer will usually help. (You must also remind them with a statement).

10. Make daily deposits

11. Make payments on Friday (Float)

12. You may have to lay off

Discuss your problems with creditors, banks, and govt.

Chapter 12

Cash Flows

1. What is cash planning?

2. Purposes of cash planning

3. Cash Inflows

4. Cash Outflows

5. Control and improving the cash position