CASH FLOW

MANAGEMENT
IN BUSINESS

CASH FLOW STRATEGIES

PROF BARJOYAI BARDAI
 The Short and Long
term
Cash flow Management
In short term – liquidity become the
focus –especially for a new
business.
 Capital or financial resources are
limited in a business.
 In the short term, liquidity is the
most crucial.
 In the medium and long term,
profitability become more
 Cash flow Management
strategies

Strategy 1 – Buy on Cash – Sell on

Cash
 A neutral strategy in relation to
Cashflow Management.
 Second best strategy
 E.g. Restaurant business

Strategy 2 – Buy on cash – Sell on

Credit.
• The worst Cash Flow Management
Strategy 3 – Buy on Credit – Sell on
Credit
 The third best Cashflow Management
Strategy.
 This strategy is adopted by
businesses that sell on installment
basis to their customers.
Strategy 4 – Buy on Credit – Sell on
Cash
 This is the best strategy from the
Cashflow Management perpective.
Strategy 5 – Buy more than is
require for sale
 This is a strategy when there is a
BUY CASH AND SELL ON CREDIT
A reluctance strategy
• Most new business had to face this strategy.
• Lack of capital
• Networks and reputation is not strong
•No support from the suppliers and marketiers
• Only owned capital are in existence – very difficult to
obtain loans.
•The choices available :
•Have to purchase on cash
•Have to sell on credit or consignment
 Buy Cash – Sell for Credit
•Becomes a major problem if debtors is
uncontrollable – bad debts will be mounting.
•Profitability become an academic issue – if profit
margin is so small – then we are working for the
bank.
• Example are – Retail shops, Petrol station, Small
manufacturing.
•Problems become more serious when large stock
exist in the business.
 How to avoid this problem ?

• Avoid retail business that involve credit at

an early stage of business.
•For new business – plan Cash Budget
carefully
• Do not use fixed loans to start a business – it
burden the cashflow with monthly
installment.
 How to plan Operational Cashflow
at an early stage of business ?
• Budget the innovation costs carefully –
costs to bring product into the market –
- First 12 months sales.
- First 12 months purchase
- First 12 months Overheads
• Innovations costs should come
from owned capital.
 Buy Cash – Sell on cash
•A reasonable strategy for a starting
business.
• Does not rely on a third part to survive.
• If profit margin is high – Cash requirement
will decline accelarely.
• Example :
• Services business - hotel, services,
tourism
• Restaurant
 Buy Credit – Sell Credit
A viable strategy for a marketing company
Credit period become very important in
determining business success.
If the credit period for purchases is higher
than the credit period on Sales – then the
business will become a cash cow.
• Example :-
•Multi-level marketing
• Supermarket
 Buy Credit – Sell on Cash
A Cash cow strategy
•This created a fast cashflow for the business.
•Cashflow does not necessarily reflect
profitability.
• If profit margin is high – it becomes a
success recipe in business.
•Example :
•Fast food restaurant
•Services business
 Buy more than necessary
A recipe for a problem business.
• Unfortunately no business can exist without
any stock at all.
• Hence – we must find strategy to minimise
stock – consignment, JIT, licence
arrangement.
• Type of stocks :
• Raw materials for manufacturing
• Work in progress
• Finished goods before sale
• Goods for display
 Create a ‘Triplets’ strategy’

• Short term strategy -

- Business that bring in fast cashflow
• Medium term Strategy -
- a very profitable business
• Long term Strategy -
- a fast growing business.
 Example of a ‘Triplet strategies’
at work
•Marketing and retails business for
short term.
•Services and food retailing ( restaurant)
as a medium term business.
•High technology company for long term
business
• All the three companies can be
synergised through a networks – to
support each other.
The biggest enermy in the Cashflow
management
• Leakage in the business cashflow –
cash continously being chanelled into a
long term project before business could
breath properly.
• Example – Cash collection from a
retail business is being used to buy
properties that is not income generating
in the short term – burying the cashflow
The biggest enermy in the Cashflow
Management
• Cash were taken out from the retail business
and invested in the high risk investment such as
the stock market.
• Cash were taken out of the retail business and
invested in the least productive assets – cars and
house.
• Cash were withdrawn from business as
withdrawal or dividend for personal use before
the business become strong.
 CASHFLOW CYCLE

THE CASH FLOW CYCLE CAN BE

CALCULATED USING THE FOLLOWING
EQUATION :

CASH FLOW AVERAGE AVERAGE AGE

CYCLE = AGE OF + OF ACCOUNTS
INVENTORY RECEIVABLE

AVERAGE AGE
- OF ACCOUNTS
PAYABLE
 BASIC RATIOS
 ACC. RECEIVABLE TURNOVER :
 AVERAGE RECEIVABLE
 = ------------------------------------ x 360 DAYS

 CREDIT SALES
 INVENTORY TURNOVER :
 AVERAGE INVENTORY
 = ----------------------------------- x 360 DAYS
 COST OF GOOD SOLD
 ACC. PAYABLE TURNOVER :
 AVERAGE PAYABLES
 = ------------------------------- x 360 DAYS
CREDIT
TO ILLUSTRATE HOW THIS EQUATION CAN BE
PUT TO USE, LET US LOOK AT THE ABC
COMPANY WHERE

COST OF GOODS SOLD = $470,570

INVENTORY =
$345,420
ACCOUNTS RECEIVABLE = $ 70,820
NET CREDIT SALES = $575,460
ACCOUNTS PAYABLE = $ 26,890
CREDIT PURCHASES = $352,927
SUBSTITUTING THESE FIGURES IN OUR EQUATION,
WE CALCULATE THE CASH FLOW CYCLE OF ABC
COMPANY AS :

CASH FLOW 70,820 345,420

CYCLE = ----------- x 360 + --------- x
360
575,460 470,570

$26,890
- ---------- x 360
$352,927

= 265 + 44 - 27 = 282 DAYS

Return on Investment (ROI)
- compare profit with profit from
investment :
Net profit
__________________
Net Investment *
* from own investment only
excluding loans.
 Return on Assets (ROA)
 Comparing profit with total assets
utilised in the operation :

Net Profit
_________________
Total Assets
Pay back period
- Determine the time required to re-
coup back the original capital

Net Investment
= _________________
Annual profit
Working Capital Concept :
Working capital Need :
Current Asset
less : Current liabilities
= Working Capital
 Working Capital Mix
- Maximise cash and marketable
securities
- Maximise Creditors
- Minime debtors
- Minime stock balance