FIVE CASH MANAGEMENT ROLES OF AN ENTREPRENEUR EXPLANATIONS

FIVE CASH MANAGEMENT ROLES OF AN ENTREPRENEUR: EXPLANATIONS AND EXAMPLES Made by Tropnikova Alexandra group 5524

WHAT IS A CASH BUDGET? It is a forecast of the firm’s cash inflows and outflows for a specific time period. It is never completely accurate but it gives a small business owner a clear picture of a company’s estimated cash balance for the period pointing out where surplus cash balance may be available for investing.

THERE ARE 5 STEPS IN CREATING A CASH BUDGET: 1)Determining an adequate minimum cash balance 2)Forecasting sales 4)Forecasting cash disbursements 3)Forecasting cash receipts 5)Estimating the end-of-month balance

DETERMINING AN ADEQUATE MINIMUM CASH BALANCE There is no reliable method for determining cash balance. Though some suggest the firm’s cash balance should be equal to at least one-forth of its current debts, this does not work for all small businesses Example: Past records may indicate that it is desirable to maintain a cash balance equal to five days sales.

FORECASTING SALES This is the heart of the cash budget. It is the central factor (referred to as principal factor) in creating an accurate picture of a company’s cash position because sales ultimately are transformed into cash receipts and cash disbursements. These methods enable small business owners to extrapolate past and present sales trends to arrive at fairly accurate sales forecasts. The forecasting of sales for new businesses is difficult if not impossible and thus entrepreneur might conduct research on similar firms and their sales patterns in their first year of operation to come up with a forecast.

FORECASTING CASH RECEIPTS Sales constitute the major source of cash receipts. When businesses sell goods and services on credit, the cash budget must account for the delay between the sale and the actual collection of the proceeds. Example: Sales made on credit in February may not be collected till March or April. To project accurately a firm’s receipts, an entrepreneur must analyze the accounts receivable to determine the collection pattern. Example: Past records may indicate that 20% of sales are for cash, 50% are paid in the month following the sale, 20% paid two months after sale, 7% after three months and 3% are never collected.

FORECASTING CASH DISBURSEMENTS Most owners of established businesses have a clear picture of a company’s pattern of cash disbursements. The key factor in recording disbursements for a cash budget is to record them in the month in which they will be paid not when the debt or obligation is incurred. Example of cash disbursements/payment of businesses include purchases of inventory or raw materials, wages and salaries, rent, taxes, insurance premiums, loans and interest, selling expense, overhead expenses and miscellaneous expenses.

ESTIMATING THE END OF MONTH CASH BALANCE To estimate a company’s cash balance at the end of month. The beginning cash balance includes cash on hand as well as cash in current and savings accounts. The owner simply adds projected total cash receipts for the month and subtracts projected total disbursements to obtain the end of month balance before any borrowing takes place. A trend of decreasing cash should alert the owner that the business is approaching a cash crisis. Preparing a cash budget illustrates the flow of cash into and out of the small business. It also enables a business owner to anticipate cash shortages and cash surpluses.

BY PLANNING CASH NEEDS AHEAD OF TIME, AN ENTREPRENEUR IS ABLE TO DO THE FOLLOWING: 1. Increase the amount and the speed of cash flowing into the company 2. Reduce the amount and the speed of cash flowing out of the business 3. Develop a sound borrowing and repayment program 4. Impress lenders and investors with the ability to plan and repay loans 5. Reduce borrowing costs by borrowing only when necessary

6. Take advantage of money-saving opportunities such as economic order quantities and cash discounts 7. Make the most efficient use of the cash available 8. Finance seasonal business needs 9. Provide funds for expansion 10. Plan for investing surplus cash

CONCLUSION The message is simple. Managing cash flow means survival for a business. Businesses tend to succeed when their owners manage cash effectively. Those who neglect cash flow management techniques are likely to see their companies fold up

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