1

Cash Management and Preparing

Financial Plan

DR. B. L. S THILAKARATHNE
 Outline of the Lecture 2

❖ What is Financial Plan

❖ Importance of the Financial Plan
❖ What is Managing Cash ?
❖ Cash Management Roles of an Entrepreneurs
❖ Preparing per forma financial plans
❖ How to forecast sales, receipts and cash
disbursements
 The Importance of Cash 3

“Everything is about cash – raising it, conserving it, collecting it.”

Guy Kawasaki

Common cause of business failure: Cash crisis!

A comprehensive financial plan helps organizations anticipate and mitigate

financial risks. Analyzing financial statements and cash flows can identify
potential risks and vulnerabilities, such as market fluctuations, liquidity
constraints, or excessive debt levels.
 4

Financial plans are

non-negotiable
when you need a
roadmap for future
resource allocation
and better cash
management.
Financial plans 5

1. Strategic Financial Plan: This plan outlines the organization’s long-term financial
goals and strategies, including market expansion, acquisitions, or new product
development.
2. Operating Budget: An operating plan works on short-term financial goals and
objectives, detailing revenue and expense projections for a specific period,
typically a year.
3. Cash Flow Management Plan: It aims to ensure sufficient liquidity by monitoring
cash inflows and outflows, managing working capital, and projecting future cash
needs.
4. Investment Plan: An investment plan defines the organization’s investment goals
and strategies, including portfolio diversification, asset allocation, and risk
management.
5. Debt Management Plan: It provides a possible framework for managing and
reducing debt, including repayment schedules, interest rates, and refinancing
options.
Financial plans 6

6. Risk Management Plan: This plan Identifies and addresses financial risks,
such as market volatility, currency fluctuations, or regulatory changes,
through strategies like insurance, hedging, and contingency planning.
7. Succession Planning: focuses on ensuring a smooth transition of ownership
or leadership within the organization, including strategies for management
succession, ownership transfers, and estate planning.
8. Retirement Planning: It aims to secure the financial well-being of
employees, offering retirement savings plans, investment options, and
strategies for long-term financial security.
9. Contingency Plan: This plan preemptively addresses potential crises or
unexpected events by developing strategies to mitigate financial risks and
ensure business continuity.
 What is Financial Plan? 7

❖ Financial planning is the task of determining how a

business will afford to achieve its strategic goals and
objectives.
Wikipedia
❖ The Financial Plan describes each of the activities,
resources, equipment and materials that are needed to
achieve these objectives, as well as the timeframes
involved.
 What is Financial Plan (Contd.) 8

 It provides the entrepreneur with a complete picture of:

❖ The amount funds and when they are coming into the organization.
❖ Where funds are going and how much cash is available.
❖ The projected financial position of the firm.
❖ The plan explains how the entrepreneur intends to meet financial
obligations and maintain the venture’s liquidity.
❖ It provides the Business Plan with consistency, by confirming that the
objectives set are achievable from a financial point of view.
 Importance of Financial Plan 9

 Common mistake among business owners:

❖ Failing to collect and analyse basic financial data.
❖ Many entrepreneurs run their companies without any
kind of financial plan.
❖ Financial planning is essential to running a successful
business and is not that difficult.
❖ It also helps the entrepreneurs to set financial targets for
the organization, and reward staff for meeting objectives.
 Importance of Financial Plan (Contd.) 10

❖ Entrepreneur has to show the readers ( Investors/venture capitalists )

how all the ideas, concepts and strategies described elsewhere come
together in a profitable way.
❖ Financial Plan is the financial roadmap for the enterprise how to spend
the money for different activities. It explains:
✓ Capital budget
✓ Manufacturing budget
✓ Marketing budget
✓ Operating Budget
 What is Managing the Cash ? 11

 Cash management includes

❖ Forecasting
❖ Collecting
❖ Disbursing
❖ Investing
❖ Planning
for the cash a company needs to operate smoothly.
Know your company’s cash flow cycle.
 The Cash Flow Cycle 12

Deliver
Goods
Order Receive Pay Sell Send Customer
Goods Goods Invoice Goods* Invoice Pays**

Day 1 15 40 218 221 230 280

14 25 178 3 9 50
Cash Flow Cycle = 240 days

*Based on Average Inventory Turnover: **Based on Average Collection Period:

365 days = 178 days 365 days = 50 days
2.05 times/year 7.31 times/year
FIGURE 12.2
 Five Cash Management Roles of an 13
Entrepreneur
1. Cash Finder
2. Cash Planner
3. Cash Distributor
4. Cash Collector
5. Cash Conserver
 Cash and Profits 14

❖ Cash ≠ profits.
❖ Profit is the difference between a company’s total
revenue and total expenses.
❖ Cash is the money that is free and readily available
to use.
❖ Cash flow measure a company’s liquidity and its
ability to pay it bills.
 Cash Flow
Increase in Cash
Cash
Decrease in Cash
Leakage

Accounts Receivable Accounts Payable

Cash Sales Production/Cash Purchases

Inventory

Leakage
 The Cash Budget

❖ A “cash map” that shows the amount and the timing of a firm's
cash receipts and cash disbursements over time.
❖ Predicts the amount of cash a company will need to operate
smoothly.
❖ Helps to visualize a company’s cash receipts and cash
disbursements and the resulting cash balance.
 Preparing a Financial Plan 17

 The plan should include pro forma:

❖ Balance sheet
❖ Income statement
❖ Cash flow statement
 Financing required and sources
 18
Balance sheet
The term balance sheet
refers to a financial
statement that reports a
company's assets, liabilities,
and shareholder equity at a
specific point in time.
Balance sheets provide the
basis for computing rates of
return for investors and
evaluating a company's
capital structure.
Income statement 19
The income statement
is one of three statements
used in both corporate
finance (including financial
modeling) and accounting.
The statement displays the
company's revenue, costs,
gross profit, selling and
administrative expenses,
other expenses and
income, taxes paid, and net
profit in a coherent and
logical manner.
Cash flow statement 20

In financial accounting,
a cash flow statement,
also known as statement
of cash flows,is
a financial statement that
shows how changes
in balance sheet accounts
and income affect cash
and cash equivalents, and
breaks the analysis down
to operating, investing and
financing activities.
 Preparing Pro Forma Financial Plan 21

Pro forma financial

statements incorporate
hypothetical numbers or
estimates. They are built
into the data to give a
picture of a company's
profits if certain
nonrecurring items are
excluded.
 22
Determine a Minimum Cash Balance

Remember Goldilocks, the Three Bears, and the porridge:

➢ Not too much...
➢ Not too little...
➢ But a cash balance that's
just right ... for you!
 Preparing Pro Forma Financial Plan 23

❖ Determine a minimum cash balance.

❖ Forecast Sales
 24
Forecast Sales
 The heart of the cash budget.
❖ Sales are ultimately transformed into cash receipts and cash disbursements.
❖ Cash forecast is only as accurate as the sales forecast from which it is
derived.
 25
Forecast Sales
“Lumpy” or seasonal sales patterns are common.
 15% to 18% of wine and spirits shops’ annual sales occur between December
15 and 31.
 40% of toy sales take place in last 6 weeks of the year.
 Forecast Sales 26

Prepare three sales forecasts:

 Pessimistic

 Optimistic

 Most Likely
 Preparing Pro Forma Financial Plan 27

❖ Determine a minimum cash balance.

❖ Forecast Sales
❖ Forecast Cash Receipts
 Forecast Cash Receipts 28

❖ Record all cash receipts when the cash is actually received (i.e. the cash
method of accounting).
❖ Determine the collection pattern for credit sales; then add cash sales.
❖ Monitor closely: Slow and non-payers.
 Collecting Delinquent Accounts 29

1 93.80%
Number of Months

2 85.20%
Delinquent

3 73.60%

6 57.80%

9 42.80%

12 23.60%

24 13.60%

0.0% 20.0% 40.0% 60.0% 80.0% 100.0%

Probability of Collection
 Preparing Pro Forma Financial Plan 30

❖ Determine a minimum cash balance.

❖ Forecast Sales
❖ Forecast Cash Receipts
❖ Forecast Cash Disbursements
 31
Forecast Cash Disbursements
❖ Record disbursements when you expect to make them.
❖ Start with those disbursements that are fixed amounts due on
certain dates.
❖ Review the business checkbook to ensure accurate estimates.
❖ Add a cushion to the estimate to account for “Murphy’s Law.”
❖ Don’t know where to begin? Try making a daily list of the items
that generate cash and those that consume it.
 Preparing Pro Forma Financial Plan 32

❖ Determine a minimum cash balance.

❖ Forecast Sales
❖ Forecast Cash Receipts
❖ Forecast Cash Disbursements
❖ Estimate End-of-Month Cash Balance
 33
Estimate End-of-Month Balance
❖ Take Beginning Cash Balance ...
❖ Add Cash Receipts ...
❖ Subtract Cash Disbursements
❖ Result is Cash Surplus
or Cash Shortage
(Repay or Borrow?)
 34
The “Big Three” of Cash Management

1. Accounts Receivable
2. Accounts Payable
3. Inventory
 Accounts Receivable 35

❖ About 90% of industrial and wholesale sales are on credit, and 40%
of retail sales are on account.
❖ Survey of small companies across a variety of industries found that
77% extend credit to their customers.
❖ Remember: “A sale is not a sale until you collect the money.”
❖ Accounts receivable goal: Collect your company’s cash as fast as you
can.
 Beating the Cash Crisis 36
Accounts Receivable
❖ Establish a firm credit-granting policy.
 Screen credit customers carefully.
 Develop a system of collecting accounts.
 Send invoices promptly.
 When an account becomes overdue, take action immediately.
 Add finance charges to overdue accounts (check the law first!).
Accelerating Accounts Receivable 37

❖ Ensure that invoices are accurate and timely.

❖ Include a description of the goods or services purchased.
❖ Ensure that invoices match purchase orders or contracts.
❖ Highlight the balance dues and due date.
❖ Include contact information in case customers have questions.
 Beating the Cash Crisis 38
Accounts Payable
 Stretch out payment times as long as possible without damaging
your credit rating.
 Verify all invoices before paying them.
 Take advantage of cash discounts.
 Beating the Cash Crisis 39
Accounts Payable

❖ Negotiate the best possible terms with your suppliers.

❖ Be honest with creditors; avoid the “the check is in the mail”
syndrome.
❖ Schedule controllable cash disbursements to come due at
different times.
❖ Use credit cards wisely.
 Beating the Cash Crisis 40
Inventory
❖ Monitor it closely; inventory can drain a company’s cash.
❖ Avoid inventory “overbuying.” It ties up valuable cash at a
zero rate of return.
❖ Arrange for inventory deliveries at the latest possible date.
❖ Negotiate quantity discounts with suppliers when possible.
 Avoiding the Cash Crunch 41

❖ Consider bartering, exchanging goods and services for other

goods and services, to conserve cash.
❖ Trim overhead costs:
 Ask for discounts and “freebies”
 Periodically evaluate expenses
 Lease rather than buy
 Avoid nonessential cash outlays
 Negotiate fixed loan payments to coincide with your company’s
cash flow
 Avoiding the Cash Crunch 42

❖ Trim overhead costs:

 Buy used equipment
 Hire part-time employees and freelancers
 Outsource nonessential activities
 Control employee advances and loans
 Establish an internal security and control system
 Develop a system to battle check fraud
 Change shipping terms
 Benefits of Cash Management 43

 Increase amount and speed of cash flowing into the company

 Reduce the amount and speed of cash flowing out
 Make the most efficient use of available cash
 Take advantage of money-saving opportunities such as cash
discounts
 Finance seasonal business needs
 12 -
Benefits of Cash Management 44

 Develop a sound borrowing and repayment program

 Impress lenders and investors
 Provide funds for expansion
 Plan for investing surplus cash
 Conclusion 45

 “Cash is King”
 Cash and profits are not the same.
 Entrepreneurial success means operating a
company “lean and mean.”
 Trim wasteful expenditures.
 Invest surplus funds.
 Plan and manage cash flow.
 46

Thank You