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Chapter 09 Entrepreneurship by Zubair A Khan.

Chapter 09 Entrepreneurship by Zubair A Khan.

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Published by Zubair A Khan
Chapter 09 Entrepreneurship by Zubair A Khan.
Chapter 09 Entrepreneurship by Zubair A Khan.

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Published by: Zubair A Khan on Mar 27, 2010
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Chapter 9 - Managing Cash Flow
A deficit is what you have when you haven't got as much as when you had nothing.--Gerald F. LiebermanThe law of cash flow: No matter how much cash you have coming in, it never comes in soon enough tocover your expenses.--Anonymous
Learning Objectives
Students will be able to:1.Explain the importance of cash management to the success of the small business.2.Differentiate between cash and profits.3.Understand the five steps in creating a cash budget and use them to create a cash budget.4.Describe fundamental principles involved in managing the "Big Three" of cash management:accounts receivable, accounts payable, and inventory.5.Explain the techniques for avoiding a cash crunch in a small company.
Instructor’s Outline
I.IntroductionA.Cash1.A four-letter word that has become a curse for many small businesses.2.Developing a cash forecast is essential for new businesses because in the early stages businesses usually do not generate sufficient cash to keep afloat.3.Controlling the financial aspects of a business with the techniques described in the previous chapter is immensely important.4.However, by themselves, those techniques are insufficient to achieve business success.Entrepreneurs are prone to focus on their companies' income statements--particularlysales and profits.a)It is entirely possible for a business to have a solid balance sheet and to make a profitand still go out of business by running out of cash.II.Cash ManagementA.Introduction1.Cash management involves forecasting, collecting, disbursing, investing, and planningfor the cash a company needs to operate smoothly.2.Managing cash is an important task because cash is the most important yet least productive asset that a small business owns.a)A business must have enough cash to meet its obligations as they come due or it will be declared bankrupt. b)Creditors, employees, and lenders expect to be paid on time, and cash is the requiredmedium of exchange.3.But some firms retain an excessive amount of cash to meet any unexpected circumstancesthat might arise.4.Proper cash management permits entrepreneurs to adequately meet the cash demands of their businesses, to avoid retaining unnecessarily large cash balances, and to stretch the profit-generating power of each dollar their companies own.5.Small business owners identified their “greatest financial obstacle” is “uneven cashflow.”6.Managing cash flow is an acute problem especially for young, rapidly growing businesses.
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.
Chapter 9 - Managing Cash Flow
 b)Cash is the money that flows through a business in a continuous cycle without beingtied up in any other asset.c)A company can operate in the short run at a negative profit, but if its cash flow isnegative, the business is in trouble.d)It can no longer pay suppliers, meet payroll, pay its taxes, or any other bills. In short,the business is headed for extinction.IV.Cash BudgetA.Described1.The need for a cash budget arises because in every business the cash flowing in is rarely“in sync” with the cash flowing out.a)Uneven flow of cash creates periodic cash surpluses and shortages. b)Many owners operate their businesses without knowing the pattern of their cashflows, believing that the process is too complex or time consuming.c)Entrepreneurs must ensure that an adequate, but not excessive, supply of cash is onhand to meet their companies’ operating needs.2.How much cash is enough?a)What is suitable for one business may be totally inadequate for another, depending oneach firm's size, nature, and particular situation. b)The small business manager should prepare a cash budget, which is nothing morethan a "cash map," showing the amount and timing of cash receipts and cashdisbursements day by day, week by week. or month by month.c)The cash budget is used to predict the amount of cash the firm will need to operatesmoothly over a specific period of time, and it is a valuable tool in managing acompany successfully.V.Preparing the Cash BudgetA.Introduction1.Typically, a small business should prepare a projected monthly cash budget for at leastone year into the future and a quarterly estimate several years in advance.2.It must cover all seasonal sales fluctuations.a)The more variable the firm's sales pattern, the shorter its planning horizon should be.3.Regardless of the time frame selected, the cash budget must be in writing for the small business owner to properly visualize the firm's cash position.4.The cash budget is based on the cash method of accounting, which means that cashreceipts and cash disbursements are recorded in the forecast only when the cashtransaction is expected to take place.5.The cash budget is nothing more than a forecast of the firm's cash inflows and outflowsfor a specific time period, and it will never be completely accurate.a)It does give the small business manager a clear picture of the firm's estimated cash balance for the period, pointing out where external cash infusions may be required or where surplus cash balances may be available for investing. b)By comparing actual cash flows with projections, the owner can revise his forecast sothat future cash budgets will be more accurate.6.Formats for preparing a cash budget vary depending on the pattern of a company's cashflow.a)See Table 9.2 for a monthly cash budget for a small department store over a four-month period.7.There are five basic steps in completing a cash budget:a)Determine an adequate minimum cash balance.

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