Teaching cash flow

management

Cash is King

Greg MalkinDirector, Entrepreneur Institute216-831-2200 x7362 gmalkin@us.edu

Syllabus 3 week unit plan

Profit versus Cashflow

Profit = Revenues - Expenses

Cashflow = Deposits into and withdrawals from our bank account.

Profit versus Cashflow

Matching = match revenue & expenses in the same period to determine profit.

Timing = Cashflow does not necessarily match the recognition of revenue and expenses.

The Cash Management Process

Estimate receipts (cash inflows) Plan expenditures (cash

outflows) Limit spending to budget

(cash control) Compare budgeted to actual

cashflows (evaluation)

Events

Purchase $1,000 of product in September with net 30 credit

Pay for product from supplier in October

Gross margin is 50%

Pay monthly salaries of $200

Product sales Sept Oct Nov

Cash 250 500 250

Credit 250 500 250

Total sales 500 1000 500

Cash Management Example

Aug Sept Oct Nov DecCash Flow

Starting 0 0 50 -400 150Cash in

Cash sales 250 500 250 0A/R 0 250 500 250Loan

Cash OutA/P 0 -1000 0 0Payroll -200 -200 -200 -200

Net cash Ending 50 -400 150 200

B/SCash 0 50 -400 150 200Inventory

Beg 0 0 750 250 0Purchase 1000 0 0 0End 750 250 0 0

A/R 250 500 250 0Total Assets 1050 350 400 200

LiabilitiesNote PayableA/P 1000 0 0 0

Equity 50 350 400 200

I/S Sept-DecRevenue 500 1000 500 2000COGS 250 500 250 1000Gross Profit 250 500 250 1000Expenses 200 200 200 800Net Profit 50 300 50 200

Homework Assignment

Case StudyCarrie Snowblower

Carrie’s Snowblowers (Q4 Income Statement)

$ 85,689Net income

3,3111% per month on ending balance

Interest payable

131,000Cash and noncashSG&A

Less:

220,000Gross margin

220,0002,200 units x $100Cost of Sales

$440,0002,200 units x $200Sales

Fourth Quarter Income Statement, Carrie Company

Will the company have to borrow money even though it is so profitable?

Carrie’s Snowblowers (Cash Receipts) 30% of all sales are for cash, 60% of receivables are collected in the month

following the sale, 35% are collected two months after the purchase, and the rest become bad debts. There are no accounts receivable outstanding at the beginning of October.

You will need to calculate the budgeted cashflows from sales for January, February and March.

+35% x (70% x $100,000) = $24,500

+ 60% x (70% x $300,000) = $126,000

= 30% x $100,000 = $30,000

Cash collections for January = $180,500

Cash collections for February = ______

+ 35% x (70% x $40,000 = $9,800

+ 60% x (70% x $100,000) = $42,000

= 30% x $300,000 = $90,000

Cash collections for December = $141,800

+ 35% of two month’s previous credit sales

+ 60% of previous month’s credit sales

= 30% of the current sales

Cash collections for the month.

Cash collections for March = ________

Carrie’s Snowblowers (Inventory purchases)

- (120% x current month’s sales

+ (120% x next month’s sales

- 200 units+ 1.2 x 500 units

= 200 unitsPurchases for October = 600 units

Purchases for December = ________Purchases for January = ___________

- 600 units+ 1,800 units= 500 unitsPurchases for November = 1,700 units

- Beginning Inventory

+ Ending inventory

Sales for the current month

Required purchases during the current month

Purchases for February = ___________Purchases for March = ___________

Carrie’s Snowblowers (Purchases payments)

February purchases= ____________

January purchases= ____________

+ .55 x 1,700 units x $100

= .45 x 300 units x $100

December purchases= $107,000

+ .55 x 600 units x $100

= .45 x 1,700 units x $100

November purchases= $109,500

+ $15,000 (given)= .45 x 600 units x $100

October purchases = $42,000

Cost of goods is $100 per unit. Inventories are bought on credit. 45% paid in the month of purchase and 55% paid in the following month. Accounts payable at the beginning of October were $15K.

Purchases = 45% x current month’ purchases + 55% x last month’s

Current month Last month

March purchases= ____________

Carrie’s Snowblowers (Q4 Cash Flow)

(128,900)

17,300 (90,200)

(16,000)

Excess (Deficit)

$369,500$144,500

$157,000

$68,000 Total cash requirements

$258,500$107,000

$109,500

$42,000 Purchases

86,000 32,500 27,500 26,000 SG&A (w/o interest)

25,000 5,000 20,000 Capital equipment

$ 20,000$ 20,000

$ 20,000

$20,000Ending Balance

$148,900$ 2,700$110,200

$36,000Borrowings (Repayments)

Less cash disbursements:

$240,600$161,800

$66,800$52,000 Total cash available

$200,600$141,800

$46,800$12,000 Sales and Receivables

Cash collections:

$ 40,000$ 20,000$20,000$40,000Beginning Cash Balance

4th Quarter

December

November

October

Cash Budget for Carrie Company — 4th Quarter

Carrie’s Snowblowers Quiz Name: ___________

Net income

1% per month on end of month loan balance

Interest payable

Cash and noncashSG&A

Less:

Gross margin

units x $100Cost of Sales

units x $200Sales

First Quarter Income Statement, Carrie Company

Assume interest is paid on the balance at the end of the month. (Example: if month ending loan balance is $8,500 then interest payment that month will be $85.

Carrie’s Snowblowers Quiz Name: ___________

Excess (Deficit)

Total cash requirements

Purchases

SG&A (w/o interest)

Capital equipment

Ending Balance

Borrowings (Repayments)

Less cash disbursements:

Total cash available

Sales and Receivables

Cash collections:

$20,000Beginning Cash Balance

1th Quarter

MarchFebruaryJanuary

Cash Budget for Carrie Company — 1th Quarter

Balance Sheet   6/30/86 - Q1 9/30/86 - Q2 12/31/86 - Q3 3/31/87 - Q4  Current Assets

Cash $ 100,000.00

$ 100,000.00

$ 100,000.00

$ 100,000

  Receivables $ 507,000.00

$ 4,580,000.00

$ 4,739,000.00

$ 1,741,000

  Inventories $ 2,808,000.00

$ 1,690,000.00

$ 1,166,000.00

$ 1,869,000

  Prepaid Expenses $ 241,000.00

$ 294,000.00

$ 198,000.00

$ 283,000

  Total current assets $ 3,656,000.00

$ 6,664,000.00

$ 6,203,000.00

$ 3,993,000

  Fixed Assets $ 3,570,000.00

$ 3,808,000.00

$ 3,987,000.00

$ 4,288,000

  Less Accumulated Depreciation $ 1,398,000.00

$ 1,564,000.00

$ 1,743,000.00

$ 1,938,000

  Net fixed assets $ 2,172,000.00

$ 2,244,000.00

$ 2,244,000.00

$ 2,350,000

  Other Assets $ 201,000.00

$ 247,000.00

$ 283,000.00

$ 302,000

Total Assets   $ 6,029,000.00

$ 9,155,000.00

$ 8,730,000.00

$ 6,645,000

 LiabilitiesAccounts Payable

$ 1,849,000.00

$ 1,717,000.00

$ 1,755,000.00

$ 1,664,000

  Notes Payable - bank $ 2,176,000.00

$ 3,727,000.00

$ 3,041,000.00

$ 1,650,000

  Income tax payable       $ -

  Current installment - long-term debt $ 980,000.00

$ 1,060,000.00

$ 207,000.00

$ 189,000

  Total current liability $ 5,005,000.00

$ 6,504,000.00

$ 5,003,000.00

$ 3,503,000

Long Term Debt            Term Loan        

Total Liability   $ 5,005,000.00

$ 6,504,000.00

$ 5,003,000.00

$ 3,503,000

 Stockholder's EquityCommon Stock

$ 1,249,000.00

$ 1,249,000.00

$ 1,249,000.00

$ 1,249,000

  Additional capital $ 105,000.00

$ 105,000.00

$ 105,000.00

$ 105,000

  Retained Earnings $ (330,000.00)

$ 1,297,000.00

$ 2,373,000.00

$ 1,788,000

Total stockholder's Equity  

$ 1,024,000.00

$ 2,651,000.00

$ 3,727,000.00

$ 3,142,000

    6/30/86 - Q1 9/30/86 - Q2 12/31/86 - Q3 3/31/87 - Q4 Year

end

Cash Flow Analysis          

Starting Cash Balance At least $100,000 156,000

100,000

100,000

100,000

         

Cash In Receipts 1,487,000

1,764,000

4,572,000

3,800,000

           

Cash Out Operating Expenses 1,928,000

2,967,000

2,698,000

2,022,000

  Interest 67,000

110,000

168,000

86,000

  Capital expenditures 177,000

238,000

179,000

301,000

  Total cash out 2,172,000

3,315,000

3,886,000

2,409,000

Net cash available   (529,000)

(1,451,000)

786,000

1,491,000

           End of month minimum cash balance  

100,000

100,000

100,000

100,000

           Loan required to reach minimum cash balance  

(629,000)

(1,551,000)

686,000

1,391,000

Cash available to payoff loan balance          

           

Loan balanceStarting balance = $1,547,000

(2,176,000)

(3,727,000)

(3,041,000)

(1,650,000)

           

Collateral 80% of receivables 406,000

3,664,000

3,791,000

1,393,000

  70% of Inventory 1,966,000

1,183,000

816,000

1,308,000

  Total collateral 2,372,000

4,847,000

4,607,000

2,701,000

Answer Section

Sales Budget June July AugustUnits FORMULA1 0 0

Dollars FORMULA2 0 0

Unit Purchases Budget June July AugustDesired ending inventory FORMULA3 0 0 Current month's unit sales FORMULA4 0 0 Total units needed FORMULA5 0 0 Beginning inventory FORMULA6 0 0 Purchases (units) FORMULA7 0 0

Purchases (dollars) FORMULA8 $0 $0

Cash Budget June July AugustCash balance, beginning $8,000 $0 $0 Cash receipts: Collections from customers: From April sales FORMULA9 From May sales FORMULA10 FORMULA11 From June sales FORMULA12 0 0 From July sales 0 0 From August sales     0 Total cash available $0 $0 $0 Cash disbursements: Merchandise FORMULA13 $0 $0 Variable expenses FORMULA14 0 0 Fixed expenses FORMULA15 0 0 Interest paid 0 0 0 Total disbursements $0 $0 $0 Cash balance before financing $0 $0 $0 Less: Desired ending balance 0 0 0 Excess (deficit) of cash over needs $0 $0 $0 Financing Borrowing $0 $0 $0 Repayment 0 0 0 Total effects of financing $0 $0 $0 Cash balance, ending $0 $0 $0

Forecasted Income StatementFor Quarter Ended August 31, 2001

Sales FORMULA16Cost of goods sold FORMULA17Gross profit FORMULA18Expenses: Variable expenses FORMULA19 Fixed expenses FORMULA20 Depreciation expense FORMULA21 Interest expense FORMULA22 Total expenses $0Net income $0

Forecasted Balance SheetAugust 31, 2001

Assets: Cash FORMULA23 Accounts receivable FORMULA24 Merchandise inventory FORMULA25 Fixed assets (net) FORMULA26Total assets $0

Liabilities & equity: Accounts payable FORMULA27 Loans payable 0 Owner's equity FORMULA28Total liabilities & equity $0

Final Assessment

ResourcesHanson Ski Products - Harvard Case Study

Case: 9-187-038 Teaching notes: 5-191-031http://hbsp.harvard.edu/

Excel for Managerial AccountingGaylord SmithISBN:978-0324016246

Management Accounting A Road of DiscoveryJames Mackey & Michael ThomasISBN: 0-538-87189

Managerial AccountingBill LeeISBN: 0-538-43173-3

All curriculum materials except Harvard case studyConsortium Conference web site