Managing Working Capital and Controlling Cash

Chapter 4Managing Working Capital and Controlling CashCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedChapter OverviewWorking CapitalCash ManagementControlsForecastsBanking ServicesCredit CardsCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedWorking Capital DefinedDifference between current assets and current liabilities OR Amount of cash required to operate a businessCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedWorking CapitalAmount of working capital is impacted by:Mix of cash and credit salesCredit card transaction processingAccounts receivablesFood and beverage turnoverVendor termsGrowthCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedWorking CapitalWays to minimize working capitalCash discountsInventory turnoverGood credit ratingManaging accounts payablesTracking transactionsCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedCash ManagementCash is convertible into any other type of assetForms of cash:ChecksMoney ordersMarketable securitiesCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedCash ForecastAssists in determining the amount of working capitalManagement estimates cash inflows and projects cash needs for 90 daysAlerts management to probable cash shortages or surpluses in advanceCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedSample Cash ForecastTheresa's Catering90-day Cash ForecastJanuaryFebruaryMarchBeginning Cash Balance$3,000$13,842$9,230Cash Receipts Cash sales15,08013,52015,280 Collection of accounts receivables -next month68,80052,80057,720 Collection of accounts receivables - 2 months12,50017,20013,200 Sales of fixed assets000Total Cash Available99,38097,36295,430Cash Disbursements Cash purchases2,9853,2883,762 Accounts payables28,67529,86025,877 Payroll28,37829,98535,245 Service on mortgage10,00010,00010,000 Insurance premium3,00000 Property taxes15,000 Partner cash distribution12,500012,500Total Cash Disbursements85,53888,13387,384Ending Cash Balance13,8429,2308,046Minimum Cash Balance10,00010,00010,000Cash surplus / (deficit)3,842 (771)(1,955)Copyright © 2007 by John Wiley & Sons, Inc. All rights reservedBanking ServicesAccount ReconciliationBank reconciles all cash accountsCreates a summary reconciliation reportAdvantageReduces administrative costs for the businessDisadvantagesSet-up feeMonthly chargeCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedBanking ServicesSweep AccountsBank invests surplus cash balances in interest earning overnight accountsAdvantageGenerate additional interestDisadvantageMonthly feeCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedBanking ServicesLockboxAssigned a numbered P.O. box for paymentsBank collects and processes payments on a daily basisAdvantageBusinesses can process payments quickly and securelyCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedBanking ServicesZero Balance AccountAll cash accounts are consolidated into a single accountSeparate checking account statements are providedAdvantageEliminates the need to maintain cash balances in each accountCopyright © 2007 by John Wiley & Sons, Inc. All rights reservedCredit CardsCredit Card Transaction FeeCharged by credit card companies to merchantsFees range from 2% to 6% of the transaction priceFee is based on:average transaction pricesales volume of the merchantCopyright © 2007 by John Wiley & Sons, Inc. All rights reserved