Cashflow Problems

6 Key excerpts on "Cashflow Problems"

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  eBook - PDF

  Managing Cash Flow

  An Operational Focus

  • Rob Reider, Peter B. Heyler(Authors)
  • 2003(Publication Date)
  • Wiley

    (Publisher)

  However, cash flow typically improves, temporarily, during times of business slowdowns touched off by recession or other causes. The reason is that during a slowdown the business continues to collect receivables on the basis of prior high- er levels of activity but disburses cash on the basis of anticipated lower levels of future activity (assuming it maintains good control over its expenditures). This creates positive cash flow. Conversely, during growth periods the opposite hap- pens—the company collects on the basis of prior, lower levels of activity, and spends money based on anticipated higher levels of future activity, thereby creat- ing a potential cash shortfall. This apparent enigma can totally befuddle managers who do not under- stand the differences between cash flow and profitability. All too many managers believe that the solution to all the company’s cash flow and profitability prob- lems is more sales, while the truth is that growth is an expensive, cash resource–intensive condition that requires careful management and detailed planning to ensure ongoing viability of the business. The economic landscape is littered with the corpses of fast-growing, profitable companies that have inade- quately managed their cash balances and have run out of money to pay their bills. It is the lack of cash to pay bills that is the immediate and direct cause of business failure, not lack of profits (even though lack of profits may be the root cause of the lack of cash).

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  eBook - ePub

  Accounting for the Numberphobic

  A Survival Guide for Small Business Owners

  • Dawn Fotopulos(Author)
  • 2014(Publication Date)
  • AMACOM

    (Publisher)

  after Step #1. Credit extension, invoicing policy, payable policy, dealing with customers, and negotiating with suppliers, banks, and internal staff are all management disciplines that have a direct impact on the cash cycle. If these are handled well, a business can achieve optimal cash flow from existing operations. Sustainable cash flow from operations reduces pressure to increase sales or borrow cash from outside sources. If the cash cycle is poorly managed, however, or, as is often the case, simply ignored, then the business is guaranteed to suffer from cash deficit.

  In this chapter, you’re going to learn some easy-to-implement strategies for streamlining your cash flow management and maximizing the amount of operating cash your business generates.

  MANAGING YOUR CASH INFLOW

  As you saw in the previous chapter, the primary reason cash comes into a business is that customers pay their bills. You also saw that most of the causes for a gap between revenue and cash have to do with how, when, or if customers pay their bills. Clearly, converting revenue to cash and improving cash flow has a lot to do with getting your customers to pay you, and especially with getting them to pay you on time .

  Did you know that if a business doesn’t get paid for its products or services within 30 days of delivery, the chances of ever seeing that money goes down dramatically? If those same invoices are still unpaid after 60 days, the likelihood that the clients will pay them plummets even further. Aged and unpaid invoices can threaten the life of the business, as products go out or services are completed with no cash coming in. (And yes, “aged” means exactly what you think: These invoices are getting older.)

  Unfortunately, many small businesses end up on life support because their managers fall prey to the following myths about how the business gets paid:

  Myth: If the business delivered brilliantly for a client, then the client will automatically pay the bill

  .

  Truth:

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  eBook - PDF

  Managerial Accounting for the Hospitality Industry

  • Lea R. Dopson, David K. Hayes(Authors)
  • 2016(Publication Date)
  • Wiley

    (Publisher)

  156 The Statement of Cash Flows CHAPTER 5 Overview In business, it is often said that “cash is king.” Those who make this statement are actually making reference to the absolutely critical role that cash and cash management will play in the successful operation of every business, including yours. Those businesses that routinely produce cash in excess of their immediate needs for it are said to have a “positive cash flow.” That is, more cash is flowing into the business than is being removed from it. Those businesses that do not generate enough cash to support their operations are said to have a “negative cash flow.” It is possible for a business with a negative cash flow to operate for a period of time. However, unless cash is provided from another source, a business with a consistent negative cash flow, at some point in time, may simply run out of the money (cash) needed to pay its bills as they come due. In this chapter, you will learn about the statement of cash flows or SCF. The SCF is a financial report that tells its readers about increases (inflows) and decreases (outflows) of cash of a business during a specific accounting period. Typically, businesses accumulate cash (by making sales), spend cash (for necessary expenses), may invest their excess cash, or they can use it to pay down any debt the business may have. In many cases, excess cash generated by the business will be returned to its owners in the form of profits or dividends. Shortfalls in cash are made up by borrowing money or by acquiring funds provided by investors. The SCF examines the cash flows resulting from a business’s operating, investing, and financing activities, and in this chapter, you will learn about the sources and uses of funds that affect cash availability. Also, you will learn how managers actually create an SCF. Finally, you will discover how hospitality managers read, analyze, and utilize the important information that is contained in an SCF.

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  Liquidity Risk

  Managing Asset and Funding Risks

  • E. Banks(Author)
  • 2004(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  A review of a typi- cal cash flow statement based on generally accepted account principles (GAAP) reveals areas where such uncertainties might appear, including revenues, costs of goods sold, receivables, payables, disposals, acquisi- tions, financings, and investments. We consider corporations and financial institutions separately. Corporations Figure 4.1 illustrates a generic non-financial corporate cash flow statement prepared under US GAAP, with a highlight of potential sources of cash flow unpredictability, including those where a company may have considerable, little, or no control over value received or paid. As the figure demonstrates, cash flow uncertainties can impact various parts of tactical and strategic operations. Tactically, a company might misjudge the size, timing, and nature of its daily business requirements or might be presented with unexpected payment demands from suppliers. Strategically, it might miscalculate the nature of market expansion, acquisitions, product development, or competi- tion. Either situation can cause the firm to underestimate its commitments and/or funding requirements. Consider, for instance, a gain/loss on the sale of an investment. If a company estimates that it will realize $100 million from the sale of a factory but only receives $75 million, it experiences an unexpected cash flow short- fall of $25 million. Or if the firm anticipates earning $1 billion of operating revenue but is forced to make extra supplier payments of $100 million (reflected in its cost of goods sold account), it again experiences a cash flow shortfall. We can also consider situations where the purchase price of a strategic acquisition is greater than originally budgeted, the non-discretionary capi- tal expenditures of a hard asset build-out exceed targets, a catastrophic event damages a facility that is underinsured, and so forth. Any one of these events can create unexpected demand for cash, increasing funding risk pressures.

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  How to Read a Financial Report

  Wringing Vital Signs Out of the Numbers

  • John A. Tracy, Tage C. Tracy(Authors)
  • 2020(Publication Date)
  • Wiley

    (Publisher)

  Part One FUNDAMENTALS 1 STARTING WITH CASH FLOWS 4 Starting with Cash Flows Savvy business managers, lenders, and investors pay a lot of atten-tion to cash flows . Cash inflows and outflows are the pulse of every business. Without a steady heartbeat of cash flows, a business would soon have to go on life support—or die. So, we start with cash flows. Cash inflows and outflows appear in a summary of cash flows. For our example in Exhibit 1.1, we use a business that has been operating for many years. This established business makes profit regularly and, equally important, it keeps in good financial condi-tion. It has a good credit history and banks lend money to the busi-ness on competitive terms. Its present stockholders would be willing to invest additional capital in the business, if needed. None of this comes easy. It takes good management to make profit consistently, to secure capital, and to stay out of financial trouble. Many busi-nesses fail these imperatives, especially when the going gets tough. Exhibit 1.1 summarizes the company’s cash inflows and out-flows for the year just ended, and shows two separate groups of cash flows. First are the cash flows of its profit-making activities— cash inflows from sales and cash outflows for expenses. Second are the other cash inflows and outflows of the business—raising capi-tal, investing capital in assets, and distributing some of its profit to shareowners. We assume you’re fairly familiar with the cash inflows and out-flows listed in Exhibit 1.1. Therefore, we are brief in describing the cash flows at this early point in the book: Summary of Cash Flows for a Business ◆ ◆ The business received $51,680,000 during the year from selling products to its customers. It should be no surprise that this is its largest source of cash inflow. Cash inflow from sales revenue is needed for paying expenses. During the year the company paid $34,760,000 for the products it sells to customers.

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  Accounting

  Business Reporting for Decision Making

  • Jacqueline Birt, Keryn Chalmers, Suzanne Maloney, Albie Brooks, David Bond, Judy Oliver(Authors)
  • 2022(Publication Date)
  • Wiley

    (Publisher)

  The time between the payment of inventory, wages and so on and the collection of debts is called the operating cash cycle. By minimising this time, an entity can save on funding costs (i.e. interest). Prudent companies tightly manage their working capital requirements and their operating cash cycle. Companies such as Woolworths Ltd have a positive operating cash cycle. This means they collect funds from sales/accounts receivable prior to paying their accounts payable. So, rather than paying funding costs through this period, they are earning interest on funds collected prior to paying their accounts payable. This can be a great competitive advantage over rival companies. The statement of cash flows is needed as it summarises the cash and types of cash flows coming into and flowing out of the entity. The statement of financial position does show the beginning and ending cash balances, but the statement of cash flows shows the various categories of cash flows. For instance, if the entity received cash from bank loans but no cash was coming into the entity through normal operations, this would indicate to a user that it would not be a good business to invest in. Likewise, if ample cash was coming in through the entity’s normal operations and it therefore had no need for cash from borrowing, this would indicate to a user that it would be a good entity to invest in. The importance of cash to the ongoing survival of a business cannot be overstated. An entity needs to have enough ready cash to ensure that it can meet its financial obligations in a timely manner, yet not too much — there are costs associated with keeping a supply of ready cash (e.g. interest payments on debt, lost investment opportunities). The ability of an entity to manage the flow of cash in and out of the business is critical for success. Paying for supplies, converting sales into cash and paying for assets are central to managing a business.

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