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15 Cards in this Set
- Front
- Back
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What is the cash flow cycle? |
the time lag between paying suppliers for merchandise or materials and receiving payment from customers after they sell the product or service. The longer the cycle the more likely to encounter cash crisis.
Measures liquidity and the company's ability to pay its bills and other financial obligations |
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How do you measure extra cash required? |
ECR = [(new sales - gross profit + extra overhead) * (average collection period * 1.20)] + (time frame in days for more sales) |
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The 5 steps to creating a cash busget |
1. Determining an adequate minimum cash balance 2. Forecasting sales 3. Forecasting cash receipts 4. Forecasting cash disbursements 5. Estimating the end-of-month cash balance |
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1. Determining an adequate minimum cash balance |
Base this on past experience of 1/4 of current liabilities |
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2. Forecast sales |
based on past sales and regression analysis, don't be too optimistic (pessimistic, optimistic, and most likely) |
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3. Forecast cash receipts |
analyse accounts receivable, determine collection patter |
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4. Forecast cash disbursements |
fixed costs are easy, purchases of goods and services very per month. Record costs in the month in which they will be paid, not when obligations incurred |
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5. Estimating the end-of-month cash balance |
cash surplus = cash receipts - cash disbursements |
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What is the best cash flow scenario? |
collect quickly, pay as slowly as possible and maintain optimal inventory |
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Cash conversion cycle |
the length of time required to convert inventory and accounts payable into sales and accounts receivable and finally back into cash |
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Process of obtaining accounts receivable |
1. Screen costumers before 2. Let customers know in advance the credit term 3. Send electronic invoice promptly 4. When payment is past due, contact customer as quickly as possible 5. Still not payed; send letter from attorney, turn over the account to a collection agency |
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Techniques for accelerating accounts receivable |
1. Speed up orders by email or fax 2. Send invoices as fast as possible 3. Make invoices clear 4. Include contact person in the case 5. Call a week after sending invoice 6. Give option to multiple payment methods 7. Deposit checks daily ... etc
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Accounts Payable |
Stretch these out for as long as possible, without damaging their companies credit rating. Verify all invoices, don't fall for scams from bogus operators. Avoid empty promises |
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Inventory |
Increase inventory turnover to improve cash flow; be proactive with markdowns of products to lessen inventory. If comparable price/ quality go for fastest supplier |
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Methods for trimming overhead costs |
- negotiate discounts and ask freebies - lease instead of buy - avoid non-essential outlays such as first-class travel or flashy cars - buy used or reconditioned equipment - hire parttime employees and freelance spcealists where possible |
