Cash Management Chapter 11

The management of money so that bills and debts are paid when they are due. Money does not always go in to a business the same way it goes out The Cycle of Cash Flow It shows that cash management is not just a problem of making sure that the balance of cash in the bank is correct and that the cashiers have the right amount of money on hand Net Income is NOT cash See page 463-465 Income and Expenses Budgets Starting point in cash budgeting is the income statement showing the bud geted revenuers and expenditures by month for as long as a period as is required for cash budget preparation. Preparing the Cash Budget Cash Receipts Current month sales revenue Accounts receivable collections Month sales rev Cash disbursements [see page 467] Closing bank balances each month is calculated: Opening bank balance + receipts disbursements = closing bank balance Each month the closing bank balance becomes the opening bank balance of the next month. Negative cash budget - a period of time when a companies disbursements exceed receipts to the point that they have negative cash amounts. typically seasonal can be anticipated during certain times of the year Cash Conservation and Working Capital Management Cash on Hand- the amount of money in circulation in the operation. used as floats for change making purposes petty cash enough on hand for day to day operations surplus should be deposited so as to earn inerest Cash in Bank- a bank account typically used to pay bills or payroll. Things to consider when determining amount needed in account anticipated cash flow unanticipated events or emergencies your cash management efficiency past experience the more cash you have, the lower your risk the less cash you have, the higher your investment

Float- the difference between the bank balance shown on a companys records and the balance of actual cash in the bank. when you write a check, there is a period of time before the check acutally clears you can anticipate this and use it to yo ur advantage when investing Concentration Banking(integrated banking)- used to accelerate funds from each chain unit directly into the home office bank account. each unit has a local bank account cash for day to day activities dispersed by head office to each unit access surplus of cash is invested balance transfers cost money and need to be kept to a minimum -Transfer Frequency Equation = 2 * avg. bank balance / avg. daily deposit Two Bank Accounts- a way to benefit from the float effect by having a bank account on the East Coast and the West Coast. The time difference can be an effective tool Accounts Receivable mail your invoices out on time follow up on delinquent accounts o money you dont have is money not earning a return set price ceilings to keep account from getting out of control use of charts and proper documentation is useful when controlling accounts receivable Lock Boxes- all payments are directly mailed to a P.O. box instead of to the individual chain unit. corporate then deals with depositing the invoices speeds up collection process may be costs attached to lockboxdetermine if profitable for you Lockbox equation to determine if this system can help to profit ------> bank charge per item / oppurtunity cost% per day * time saving in days Marketable Securities- investments in notes or similar securities that can be readily converted into cash. any surplus of cash should be invested short-term and long-term investments are available Risk and Liquidity important when investing - low risk = low interest rate - high risk = high interest rate

Inventories The level at which inventories should be maintained for food and beverages can be established by calculating the inventory turnover rates for each. Food cost for the month Average food inventory during month Food Cost is calculated : Beginning of month inventory + Purchases during month end of month inventory Average Inventory: (Beginning of month inventory + Purchases during month end of month inventory) / 2 Accounts Payable, Accrued Expenses, and Other Current Liabilities Objective here is to conserve cash in the organization, is to delay paymet until payment is required. Example : [pg. 478] $980 *50 days * 8% 365 days = $10.74 Other Items There are other methods of operating w/ the objective of conserving cahs in the business. Long Range Cash Flow This budget offers somewhat from day-to-day cash budgeting. It gives projections ignore any changes w/in working capital and assume that the current asset and liability amounts remain relatively constant over the long run. Starting point in preparation of a long-range cash flow budget is the annual new income figure. Long-term cash flow budget serves the following purposes: *Allows the manager to see whether there will be cash available to meet longterm mortgage, bond, and other loan commitments. *Indicates a possible need to arrange additional long-term borrowings or the need to issue additional stock to raise cash. * Allows for planning replacement of additions to long-term assets. * Permits the planning of a dividend payment policy since it shows whether or not there will be surplus cash available for dividends. Cash Flow and CVP After-tax figure that has to be converted to a before tax amo unt by the following equation:

Profit before tax = After tax profit 1-Tax rate [see page 479 for more info]