Ans1: Cash management refers to a broad area of finance involving the collection, handling, and usage of cash. It involves assessing market liquidity, cash flow, and investments.
At its simplest, cash flow management means delaying outlays of cash as long as possible while encouraging anyone who owes you money to pay it as rapidly as possible.
Q2). How can I increase positive cash flow?
Ans2: Your cash reserves continue to be low due to residual effects from the past year and the efforts to stabilize moving forward. Many customers are now accustomed to paying late (if at all), so you’ve had less cash coming in. How can you generate more positive cash flow and maintain it for the long term?
Much depends on your internal collection efforts. Do you focus on the accounts that are 30 to 60 days past due, or the ones 90 to 120 days (and more) past due? Age is the greatest deteriorating factor in the collectability of a debt. So if you’re putting your internal energy and dollars into pursuing accounts over 90 days, the 30-to-60-day slow-pays are becoming less collectable by the moment. And you’re in a vicious cycle. The key is pro-activity:
Call slow-pays immediately after due date. Reopen the lines of communication to remind customers of their obligation. Identify any service issues and resolve billing disputes. •
Make payment arrangements. Process full payment over the phone or set up a payment plan. If you don’t try to get partial payment, those dollars may not be available next month. •
Call habitually slow-paying customers first. You already know it’s not a service issue — they’re just slow to pay. Keep on top of these accounts. •
Review aging reports weekly. Make sure you know exactly where accounts are falling in the delinquency cycle so that you can prioritize your internal efforts. •
Q3). How can I get customers to pay on time?
Ans3: The load-to-load mentality has developed over many years. Historically, propane marketers allowed nonpayment until customers needed their next tank of fuel. At one time, they could still realize a decent profit within this loose payment structure — but not in today’s economy.
There is no payment flexibility when it comes to customers’ electric, phone, cable, and other utility bills. So they’ve learned to prioritize and pay those on time. The goal is to change the load-to-load mentality and help customers view their fuel bill as a utility bill. You can’t force timely payment, but you can encourage a change in payment behavior:
Send invoices on time. Timely submission lets customers know that you expect the same. •
Identify credit terms. Your invoice should be accurate and easy to read, and it should prominently state your credit terms so there’s no room for confusion. •
Create a sense of urgency. Clearly state the due date in no uncertain terms. The phrase “Due Oct. 30, 2015” is far more impactful than “Payable in 30 days.” •
Emphasize benefits of prompt payment. Remind customers that timeliness is the key to maintaining a good credit rating and avoiding a credit hold. •
Q4). How do I retain customers and sustain those relationships?
Ans4: Customers who developed slow/no pay buying habits in 2013/2014 have a choice for the months ahead: Do I pay my outstanding bill plus the cost of another tank of fuel, or do I go elsewhere and just pay for my new supply?
That load-to-load mentality leads to attrition. So does the strain placed on relationships with customers who were once in good standing but had difficulties during the 2013-2014 winter. At the same time, your competitor’s loss for these reasons could become your gain. And while new customers seem like a blessing, if they’re the result of attrition elsewhere, they could actually be a liability. The best course of action is customer education and communication:
Maximize sales opportunities while minimizing risks. Pull credit reports on new customers. Determine to whom you’ll extend credit and how much (for example, limited credit based on their credit report, collect on delivery, or full credit). •
Revamp your credit policy and procedures. Make sure your policies aid timely payment and customer retention. For example, if you place a debtor on COD once he finally pays, you’re encouraging him to go to a competitor who will sell him fuel on credit. The most effective strategy is to educate customers about paying on time — not chase them to the competition. •
Say thank you to customers for their business. Create an incentive for early orders or payment. Request feedback and respond. •
Q5). How do I reduce the burden on my internal staff?
Ans5: As you take steps to correct your slow-pay and dead accounts, you may continue to face challenges for your overworked staff members. The goal is not to increase their workload, but to create efficiencies that ensure maximum value for their efforts:
Maintain good customer data. Pull credit reports and get contact information from every new customer so you don’t waste time chasing it down when you need it. And be sure to update your database with new addresses, phone numbers, or names on the account. •
Maintain good account data. When you contact a customer, you need to know more than just how much he owes; you need his payment record, history of broken promises, and so on. You’ll save an exponential amount of time when data is up to date and readily available. •
Make phone calls count. Call on different days of the week. Try evenings and weekends when contact is most likely. Use a cell phone or block your company’s number to avoid screening. •
Get a commitment. If you can’t secure full payment, set up payment terms and get the debtor’s commitment that he will follow through. Specify each due date and payment amount, and enter all details into your system. Make one call that gets results to avoid making multiple, time-consuming, ineffective ones. •
Q6). How do I support my internal efforts with a third party?
Ans6: The key to effective cash flow management is early intervention. The earlier in the delinquency cycle you forward an account to a reputable third party, the higher the recovery results. And you’ll free up more of your staff members’ time to do what they do best — service your customers. When choosing a third party, some key considerations include whether it:
Specializes in the propane industry. The company is familiar with your unique challenges and knows how to communicate with your customers. Ask about references and endorsements. •
Focuses on customer retention. You’ve taken steps to ensure positive communication while trying to return accounts to good standing. Your third-party resource should do the same. •
Works on a fixed-fee basis. Some firms can charge 33% to 50% contingent fees, which makes early placement cost-prohibitive and any recoveries nominal. •
Offers comprehensive services. Does the company perform courtesy calls, first-party billing, and third-party collections? The more your partner can do on your behalf, the less the burden on your internal staff. •
Guarantees results. Most business owners wait to engage a third party to avoid throwing good money after bad. If you work with a fixed-fee based service that guarantees results, you can get a substantial return on your investment. •
Q7).If you are unable to secure credit and credit has been cut or credit lines have been closed, how do you keep the doors open to your business?
Ans7: You will need to sell the inventory that you have and pay cash for all inventory and services that you need until you can build up your credit again. Managing your money with your cash flow chart will help so that you are aware of all expenses. Cutting expenses and increasing sales is always the goal.
Q8). How important is it for start-ups to calculate their break-even point and what is the easiest way for a non-financial person to do it?
Ans8: Create a simple spreadsheet that lists all the income from sales each day, week, month and year and all the expenses that the company has to pay out. (SBA.gov has more information on this topic here: Breakeven Analysis.) There are templates online that you can use; for example, SCORE offers a free Breakeven Chart that you can use.
Q9).I have a hard time getting clients to pay on time. If they don’t pay on time, I have a hard time meeting our expenses. Any suggestions on how to get paid quicker?
Ans9: You can offer a discount for COD (cash on delivery) or net 10 days; it could be 2% off for paying more quickly. Otherwise, the only way to get paid quicker is to call weekly and remind your customer that money is due and offer to take a charge card over the phone. (For more tips, check out these blogs: Tips for Collecting from Non-Paying Clients and How to Get Paid Faster With a Better Invoicing Process.
Q10): I am in the process of opening a coffee shop. How much inventory should I purchase for startup so that I do not overbuy?
Ans10: With your financial projections, you can guess about how much you will be selling. Buy as little as possible to start—but make sure that you can get a quick delivery, as you never ever want to run out of anything. This is something that you will learn as you are in business.
Q11: Is there a set percentage to mark up the prices for merchandise? Also, if I can get a discount from a vendor for purchasing a higher volume, do I sell it at a discount or should I sell it at the price I had before the discount?
Ans11: A mark-up can vary depending on your overhead costs. Higher overhead would require a higher mark-up. Always sell your merchandise for as much as the market will bear. If there is a higher perceived value, people will pay more. The discount from the vendor means more profit in your pocket.
Q12).What options do micro businesses (mom & pop) size have in obtaining periodic help needed with small loans to help with cash flow?
Ans12: A line of credit is the easiest way to have money available as needed. You would have a limit and use it as needed and pay only for what you use. If you are not able to get a line of credit, you need to make sure that your sales increase to create cash flow. Give your customers incentives to buy more or offer discounts.
Q13): At what point should you consider using a collection agency to help you collect on past due receivables?
Ans13: Collection agencies take 30%, so try to collect on your own by calling and offering credit terms or returns or credit card payment. If the company does not have the money, you will not be getting paid so your only hope is to take back the merchandise if you can.
Q14): What is the formula to determine how much cash reserves a business should hold?
Ans14: Always have enough cash reserves to cover your slow months in business. You should be safe if you can have 3-6 months or more to cover all unknown or variable expenses that may come up. Always consider increasing your sales and moving your inventory as quickly as you can.
Q15).What is the cash flow forecast?
Ans15:A cash flow forecast is an estimate of the amount of money you expect to flow in and out of your business and includes all your projected income and expenses. Aforecast usually covers the next 12 months, however it can also cover a short-term period such as a week or month.
Q16).What is the cash plan?
Ans16: Along with managing inventory, better cash management is key to reducing working capital. As a result, being able to accurately forecast net cash flows and quickly model different scenarios, such as how fast to pursue growth initiatives without having to resort to external funding, is a top priority for CFOs.
Q17):How do you improve cash flow?
Ans17:If you want to improve cash flow, think about implementing some of the following strategies.
- Lease, Don’t Buy. …
- Offer Discounts on Loans. …
- Conduct Credit Checks on Customers. …
- Form a Buying Cooperative. …
- Improve Your Inventory. …
- Send Invoices Out Immediately. …
- Use Electronic Payments. …
- Pay Suppliers Less.
- Open a High-Interest Savings Account
- Increase Pricing
Q18).How do you manage your business?
Ans18: To effectively delegate responsibility and authority in your organisation you must:
- Accept the power of delegation.
- Know the capabilities of subordinates.
- Ensure that specific training is available.
- Select specific responsibilities to be delegated.
- Clearly define the extent and limits of delegation.
Q19).What are the business skills?
Ans19: The greatest people in business have certain attributes in common. Several personal qualities are important, like a thirst for continuous education, personal drive and motivation, strong goals and ambition, clear vision, and always a great deal of passion.
Q20).What is the difference between the direct method and the indirect method for the statement of cash flows?
Ans20: The main difference between the direct method and the indirect method involves the cash flows from operating activities, the first section of the statement of cash flows. (There is no difference in the cash flows reported in the investing and financing activities sections.)Under the direct method, the cash flows from operating activities will include the amounts for lines such as cash from customers and cash paid to suppliers. In contrast, the indirect method will show net income followed by the adjustments needed to convert the total net income to the cash amount from operating activities.
The direct method must also provide a reconciliation of net income to the cash provided by operating activities. (This is done automatically under the indirect method.)
Nearly all corporations prepare the statement of cash flows using the indirect method.
Q21).Is the direct method still used in the statement of cash flows?Ans21: The direct method of preparing the statement of cash flows is recommended by the Financial Accounting Standards Board (FASB). However, the direct method is rarely used.
Recent editions of Accounting Trends & Techniques published by the American Institute of Certified Public Accountants surveyed 500 annual reports and found that less than 10 used the direct method, while more than 490 used the indirect method.
Q22).What is a cash cow?Ans22: A cash cow is often a profitable product or service that dominates a market and generates far more cash than is needed to maintain its market position. Companies may use the money from the cash cow to develop new products or to acquire other businesses.The term cash cow is also used to describe a division or segment of a company that consistently generates substantial amounts of excess cash.
Q23).Where is interest on a note payable reported on the cash flow statement?
Ans23: The interest paid on a note payable is included in the first section of the cash flow statement entitled cash flows from operating activities.
If a company reports its cash flows from operating activities by using the indirect method, the interest expense for the period is included in the company’s net income or net earnings. The interest expense will be adjusted to a cash amount through the changes to the working capital amounts, which are also reported as part of the operating activities. In addition, the actual amount of interest paid must be disclosed.
If the cash flow statement, or statement of cash flows, is prepared using the direct method, the amount of interest paid should appear as a separate line within the cash flows from operating activities.
The cash payments and cash receipts of principal on a note payable are reported in the financing activities section of the cash flow statement.
Q24).Why is the Cash Flow Statement identified as one of the financial statements?
Ans24: The Cash Flow Statement or Statement of Cash Flows is required as part of a full set of financial statements because of the Financial Accounting Standards Board’s Statement of Financial Accounting Standards No. 95, Statement of Cash Flows.
Q25: If a company issues stocks or bonds to pay outstanding debt, should this noncash transaction be included in the cash flow statement?
Ans25: If a company issues stocks or bonds for cash and then pays off the debt, the transaction is reported in the financing section of the statement of cash flows.If the transaction is a direct conversion of debt to equity (shares of stock) or debt to bonds and no cash receipts or cash payments occur, the transaction is to be disclosed as supplementary information.
Q26: Where can I find a sample of a cash flow statement?
Ans26: A cash flow statement or statement of cash flows should be presented with a U.S. corporation’s annual financial statements.
If a corporation’s stock is publicly traded, the statement of cash flows will be included in its annual report to the Securities and Exchange Commission.
Q27).What is petty cash?Ans27: Petty cash is a small amount of cash on hand that is used for paying small amounts owed, rather than writing a check. Petty cash is also referred to as a petty cash fund. The person responsible for the petty cash is known as the petty cash custodian.
Some examples for using petty cash include the following: paying the postal carrier the 17 cents due on a letter being delivered, reimbursing an employee $9 for supplies purchased, or paying $14 for bakery goods delivered for a company’s early morning meeting.
The amount in a petty cash fund will vary by organization. For some, $50 is adequate. For others, the amount in the petty cash fund will need to be $200.
When the cash in the petty cash fund is low, the petty cash custodian requests a check to be cashed in order to replenish the cash that has been paid out.
Q28). What are net incremental cash flows?Ans28: Net incremental cash flows are the combination of the cash inflows and the cash outflows occurring in the same time period, and between two alternatives. For example, a company could use the net incremental cash flows to decide whether to invest in new, more efficient equipment or to retain its existing equipment.
Net incremental cash flows are necessary for calculating an investment’s:
- net present value
- internal rate of return
- payback period
To illustrate net incremental cash flows let’s assume that Your Corporation has the opportunity to purchase a product line from Divesting Company for a single cash payment of $800,000. Your Corporation expects that the product line will result in the following cash flows occurring in each year for 10 years:
- additional cash receipts or cash inflows of $900,000 (from the collection of accounts receivable related to product sales)
- additional cash payments or cash outflows of $750,000 (for payments related to the product line’s costs and expenses)
These cash flows indicate that the net incremental cash flows are expected to be a positive $150,000 per year for 10 years, or that there will be net incremental cash inflows of $150,000 per year for 10 years.
Q29). What is a petty cash voucher?Ans29: A petty cash voucher is usually a small form that is used to document a disbursement (payment) from a petty cash fund. Petty cash vouchers are also referred to as petty cash receipts and can be purchased from office supply stores.
The petty cash voucher should provide space for the date, amount disbursed, name of person receiving the money, reason for the disbursement, general ledger account to be charged, and the initials of the person disbursing the money from the petty cash fund. Some petty cash vouchers are prenumbered and sometimes a number is assigned for reference and control. Receipts or other documentation justifying the disbursement should be attached to the petty cash voucher.
When the petty cash fund is replenished, the completed petty cash vouchers provide the documentation for the replenishment check.
Q30).What is the difference between Present Value (PV) and Net Present Value (NPV)?Ans30: Present value is the result of discounting future amounts to the present. For example, a cash amount of $10,000 received at the end of 5 years will have a present value of $6,210 if the future amount is discounted at 10% compounded annually.
Net present value is the present value of the cash inflows minus the present value of the cash outflows. For example, let’s assume that an investment of $5,000 today will result in one cash receipt of $10,000 at the end of 5 years. If the investor requires a 10% annual return compounded annually, the net present value of the investment is $1,210. This is the result of the present value of the cash inflow $6,210 (from above) minus the present value of the $5,000 cash outflow. (Since the $5,000 cash outflow occurred at the present time, its present value is $5,000.)