Chapter 9: Managing Cash Flow

Chapter 9: Managing Cash Flow

1. Why must small business owners concentrate on effective cash flow management?

Small business must concentrate on effective cash flow management because cash is the most important yet less productive asset owned by a small business. Also, proper cash management permits entrepreneurs to adequately meet the cash demand of their business, to avoid retaining unnecessarily large cash balances, and stretch the profit-generating power of each dollar their companies own. Moreover, for small new business that are "cash sponges" are more vulnerable to suffering cash shortages as well as rapidly growing businesses cash flow management is important because otherwise they may become insolvent, as inventory and receivables increase faster than profits. Also, small businesses must find a balance in which they maintain enough cash to meet the firm's normal requirements plus a reserve for emergencies without retaining excessively large unproductive cash balances.

2. Explain the difference between cash and profit.

Cash is the money that is readily available to use in a business and the flows of cash measure the company's liquidity and its ability to pay its bills and other financial obligations on time by tracking the cash inflows and cash outflows of the business over a period of time. On the other hand, profit is the difference between total revenues and total expenses, and it measures how efficiently the business is operating. A business may be making profits and filed for bankruptcy because it had run out of cash.

3. Outline the steps involved in developing a cash budget.

Determining an adequate minimum cash balance

Forecasting cash receipts

Forecasting cash disbursement

Estimating the end of month cash balance

4. How can an entrepreneur launching a new business forecast sales?

It can make research on sales made by other companies in the same industry or research information from the local chamber of commerce.

5. Outline the basic principles of managing a small firm's receivables, payables and inventory.

The basic principle regarding receivables, payables and inventory is the following: Accelerate receivables and turnover ratio while stretching out payables as long as possible without losing credit rating.

6. How can bartering improve a company's cash position?

The exchange of goods and services for other goods and services, is an effective way to conserve cash. In order to conserve cash companies using bartering to transform slow moving and excess inventory into much needed goods and services.

7. Alan Ferguson, owner of Nupremis, Inc., a web based on application service provider, says, "We lease our equipment and technology because our core business in developing it, not owning it." What does he mean? Is leasing with cash management strategy for small business? Explain.

It depends on the company's growth for leasing such equipment and technology. When the company experiences an increase in leasing new employees have to be hired and expand plant capacity as well. However, when a company has too much inventory problems can arise in term of moving cash.

8. What