Cash

Lifeblood of the Business

Chapter 14

McGraw-Hill/Irwin Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved.
 Learning Objectives

LO1 Explain the importance of managing your

business’s money.
LO2 Explain the concepts of money, cash, and
cash equivalents.
LO3 Explain the basics of managing cash flow.
LO4 Reconcile bank and company book
balances.

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 Learning Objectives

LO5 Develop a cash budget.

LO6 Develop strategies for preventing and
coping with cash flow problems.
LO7 Implement strategies for coping with cash
shortages.

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 Money In/Money Out

Cash-to-cash cycle
– The time that is required for a business to
acquire resources, convert them into
product, sell the product, and receive
cash from the sale.
– Also called operating cycle

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 Percentage of Small Businesses that
Experience Cash Shortages by Number of
Employees

Figure 14.1

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 The Cash-to-Cash Cycle

Figure 14.2

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 Money In/Money Out

 Payables  Receivables
– Amounts owed to – Amounts that are
vendors for owed to a business
merchandise or for merchandise
services purchased that was sold on
on credit (see credit (see
receivables). payables).

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 Cash-to-Cash Cycle

Many Vendors,
Few Customers
Figure 14.3

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 Cash-to-Cash Cycle

Many Customers,
Few Vendors

Figure 14.4

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 Money as the Key Idea

Money
– a medium of exchange accepted by the
community or what people buy things
with and sell things for.
– provides a standard for measuring value,
so that the worth of different goods and
services can be compared
– A store of value that can be saved for
later purchases

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 Money as the Key Idea

Purposes of Money
1. To make exchanges
2. To keep track of wealth or value

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 Cash and Cash Equivalents

Cash
– Money that is immediately available to be
spent.
Cash equivalents
– Assets that may be quickly converted to
cash.

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 Question

Money held in checking and savings

accounts is called ____________.
A. Cash
B. Currency
C. Demand deposits
D. Commercial paper

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 Cash and Cash Equivalents

 Currency  Demand deposits

– The bills and coins – Money held in
printed by checking and
governments to savings accounts.
represent money.

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 Cash and Cash Equivalents

Marketable securities
– Stocks and bonds that are traded on an
open market.
Commercial paper
– Notes issued by credit-worthy
corporations.

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 Cash and Cash Equivalents

 Short-term debt  Bearer

– Any debt that must – Any person or
be paid in less than business entity who
one year from the possesses a
date of the security.
financial statement
on which it is
reported.

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 Sources of Cash Flow

1. Cash can be obtained by selling the

products and services of the business
and collecting cash from customers.
– Called cash flow from operations

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 Sources of Cash Flow

2. Cash can be obtained from

investments the business has made,
such as stocks, bonds, land, buildings,
or equipment
- Called cash flow from investing.
3. A business may obtain cash through
financing.

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 Sources of Credit and Debt for
Small Businesses

Figure 14.5

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 Company and Bank Cash
Balances
Company book balance
– The sum of cash inflows and cash outflows
recorded in the firm’s accounting records.
– Usually called the cash account

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 How Checks Get Cleared

Figure 14.6

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 Company and Bank Cash
Balances
Bank ledger balance
– The sum of deposits and withdrawals
recorded in a bank’s accounting records.
Bank available balance
– The sum of money that has actually been
received and paid out of a depositor’s
account.

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 Company and Bank Cash
Balances
Clearinghouse
– An entity that processes checks and
electronic fund transfers for banks and
other financial organizations.

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 Company and Bank Cash
Balances
 Overdraft  Float
– A negative – Delays in the
balance in a movement of
depositor’s bank money among
account. depositors and
banks.

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Reconciling Bank Balances with
Company Book Balances
Reconciling
– An accounting process that identifies the
causes of all differences between book
and bank balances.
Charge back
– A reduction in the bank account of a
merchant by a credit card company.

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Reconciling Bank Balances with
Company Book Balances
Nonsufficient funds
– A situation that occurs when a check is
returned to a depositor because the
writer of the check did not have a bank
available balance equal to or greater
than the amount of the check.

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 Planning Cash Needs

Cash budget
– A cash budget identifies when, how, and
why cash is expected to come into the
business, and when, how, and why it is
expected to leave.

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 Cash Receipts Budget

Cash receipts budget

– A schedule of the amounts and timings of
the receipt of cash into a business.
Cash disbursements budget
– A schedule of the amounts and timings of
payments of cash out of a business.

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 Protecting Cash from Being
Stolen
Most common ways employees
steal cash
1. Larceny
2. Skimming
3. Phony disbursements

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 Techniques to Increase Cash
Inflows
Deposits and progress payments
– Cash payments received before product
is completed or delivered.
Discounts for prompt payment
– A reduction in sales price provided to
credit customers for paying outstanding
amounts in a timely manner.

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 Techniques to Increase Cash
Inflows
Noncore projects
– Revenue-producing tasks and activities
related to, but not part of, the primary
strategy of a business.
Factoring receivables
– Borrowing money secured by a firm’s
accounts receivable.

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 Techniques to Decrease Cash
Outflows
Trade discounts
– Percentage discounts from gross invoice
amounts provided to encourage prompt
payment.
Noncash incentives
– Rewards that do not require payment of
cash, such as stock options,
compensating time off, or added
vacation days.

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 Techniques to Decrease Cash
Outflows
Consignment
– The practice of accepting goods for
resale, without taking ownership of them
and without being responsible to pay prior
to their being sold.
Barter
– The practice of trading goods and
services without the use of money.

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 Techniques to Decrease Cash
Outflows
Timing purchases
– A method of controlling the timing of cash
outflows that is invisible to suppliers and
vendors.
Gaming the payment process
– Using methods to appear to be paying
bills on time, when in fact payment is
being delayed or avoided.

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 Question

__________ is/are a financial crisis that is

caused by a business growing faster
than it can be financed.
A. Speed trap
B. Growth trap
C. Growing pains
D. Speed bump

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 Controlling Cash Shortages

Growth trap
– A financial crisis that is caused by a
business growing faster than it can be
financed.

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 Eight Top Strategies for Handling
Cash Shortages

Figure 14.7

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