Section III Building the Business Plan: Marketing and Financial Considerations
a)Fast-track companies are most likely to suffer cash shortages because they act like“cash sponges,” soaking up every available dollar and then some. b)The result is that many successful, growing, and profitable businesses fail becausethey become insolvent; they do not have adequate cash to meet the needs of agrowing business with a booming sales volume.c)If a company's sales are up, the owner also must:(1)hire more employees(2)expand plant capacity(3)increase the sales force(4)build inventory(5)incur other drains on the firm's cash supply.d)The cash crisis may force the owner to lose equity control of the business or,ultimately, declare bankruptcy and close.(1)Table 9.1 describes the five key cash management roles every entrepreneur mustfill.7.Managing cash more effectively:a)First Step: Cash flow cycle – the time lag between paying suppliers for merchandiseand receiving payment from customers (see Figure 9.1).(1)The longer this cash flow cycle, the more likely the business owner is toencounter a cash crisis.(2)Preparing a cash forecast that recognizes this cycle, however, will help avoid acrisis. b)Second Step: Begin cutting down the length of the cash flow cycle.(1)Reducing the cycle from 240 days to, say, 150 days would free up incredibleamounts of cash that this company could use to finance growth and dramaticallyreduce its borrowing costs.c)See Figure 9.1 for steps in reducing the length of cash cycle.III.Cash and Profits Are Not the SameA.Described1.Profit (or net income) is the difference between a company's total revenue and its totalexpenses. It measures how efficiently the business is running.a)As important as earning a profit is, no business owner can pay creditors, employees,and lenders in profits; those payments require cash. b)Profits are tied up in many forms, such as inventory, computers, or machinery.2.Cash is the money that flows through a business in a continuous cycle without being tiedup in any other asset.3.Cash flow is the volume of cash that comes into and goes out of the business during anaccounting period.a)Figure 9.2 shows the flow of cash through a typical small business. b)Decreases in cash occur when a business purchases, on credit or for cash, goods for inventory or materials for use in production.c)When cash is taken in or when accounts receivable are collected, the firm's cash bal-ance increases.d)Purchases for inventory and production lead sales; that is, these bills typically must be paid before sales are generated.e)But, collection of accounts receivable lags behind sales. However, customers who purchase goods on credit may not pay until a month or later.4.No business owner can pay creditors, employees, and lenders in profits; that requirescash!a)Profits are tied up in many forms, such as inventory, computers, or machinery.