cashmgt

DEVELOPING AN EFFECTIVE
CASH MANAGEMENT SYSTEM

This web site was a FREE gift from 'The Profit Doctor' to show you how to increase your cash income. Just because you have 'PROFITS' does not mean that you have a good cash flow. Many businesses that showed profits, even millions of dollars of profits, are no longer in business because they did not have the cash flow to pay their bills.

CASH IS THE LIFE BLOOD OF A BUSINESS!!

To have an effective cash management system there are several concepts that make it up. They are from projecting out the future cash needs of the company to tracking the actual receipts and expenditures of your cash. This procedure will explain the cash management system in the following order:

I. Cash Flow Forecasting and Analysis
II. Inventory Needs in Dollars
III. Accounts Receivable Tracking
IV. Accounts Payable Tracking
V. Annual Cash Projections
VI. Daily Flash Report
VII. Cash Position Reporting (Two styles)
VIII. Maximization of Interest Income

I. CASH FLOW FORECASTING AND ANALYSIS (FORM A)

A Cash Flow projection is a forecast of cash funds that you anticipate receiving, on one hand, and distributing on the other hand, through the course of a given time span. It is the anticipated cash position at specific times during the reporting period. Although cash forecasts may be developed for any period of time, it is suggested that it be utilized initially, on a weekly basis.

The purpose of establishing a weekly cash flow projection, is to determine deficiencies, or excesses in cash, from that which is necessary to operate the business. In the event that deficiencies are revealed in the cash position, financial plans must be altered, either to provide more cash through utilization of lines of credit, equity capital loans, increased bank loans, reduction of expenditures, or by delaying payments as applicable, until a proper cash balance is obtained. The object is to have at least a small positive cash position in the bank at the end of the week.

If excesses of cash are revealed, it may indicate over borrowing, or idle money that can be put to work. The objective is to develop a plan which, if followed, will provide a well managed flow of cash.

The projection becomes more useful when the estimated information can be compared with actuals as the data becomes available. Utilizing the cash projections properly is setting up your operations for added profit. In summary, the cash position for each period should be adequate to meet the requirements for the following period. If too little cash is available, then cash paid out must be reduced or additional cash injected. If too much cash is available, then the money is not working for your business properly.

FORMAT

The Cash Flow Projection form (FORM A) located at the end of this procedure, provides a systematic method of recording estimated cash receipts and expenditures, which can be compared with actual receipts and expenditures as they become known. The entries listed under the Description column apply to your business, as denoted on your chart of accounts, are self explanatory. This form is designed to be used for a months time frame by week. Some months have 4 weeks, and others have only 4. Use this form to project out the complete months cash needs.

Each column to the right has a PROJECTED and ACTUAL heading. Complete the forecast starting with the actual cash balance in the first weeks column and project the cash sales for the week, the amount of cash received from accounts receivables, and any other cash income (from loans, sales of stock, etc.) and then add these to the beginning balance to come up with the ending bank balance figure. Project the remaining expense items based on your best estimate of expenses. Using the ending balance of week one, place this number in the beginning bank balance in the next week, and this is also done for each of the following weeks. Complete the remaining weeks forecast and then you will have a period by period forecast of planned cash requirements. Normally, there will be fluctuations from period to period and some periods may be negative. If this is the case then plans must be made to either defer cash payments or acquire additional funding.

At the end of each period, actual receipts and expenditures shall be posted in the ACTUAL column. You will then have a measure of forecasting verses actual performance. Variances should be explained and adjustments made to following periods as necessary.

II. INVENTORY NEEDED SPREADSHEET (FORM B)

In order to project out your cash needs properly, you need to project out your inventory needs. This is typically used in any company that sells products for a business. This can be accomplished by doing the following. Using a thirteen column Accounts Worksheet Pad (or using a spreadsheet program on the computer) place the sales that need inventory purchased in the wide column on the left. Place along the top the week of starting this process (using the dates which a week starts and ends). In the last column, place the title TOTAL.

Now, going back to each and every order listed in the far left column, place the amount of cash needed to purchase the materials for that particular job. If you can purchase the items needed from a vendor that allows you to use more credit, do not place the dollar figures here. Only place the amount of cash needed and when to pay on the invoice once it is received. On the bottom of each column, place the total needed for the week to purchase materials.

III. ACCOUNTS RECEIVABLES WORKSHEET (FORM C)

The Accounts Receivable Worksheet is utilized to detail your accounts receivables expected to come in during each week of the month. This worksheet will be utilized to help you determine the necessary cash receipts from accounts receivables on the Weekly Cash Flow Analysis FORM A. In the far left column place the name of any accounts that are outstanding, and also place the total owed to your company on their account. Based on your billing procedures, and the track record of each customer, place the amount of money you anticipate from each of the accounts into the week that you anticipate the money to come in. Then this can be used to fill in the Accounts Receivable portion in FORM A.

IV. ACCOUNTS PAYABLE LOGS (FORM D)

The primary purpose of the Accounts Payable Log (FORM D) is the management of invoices payable to capture discounts, avoid penalties, and secure the optimum use of minimum working capital. The primary purpose of the Vendor Log (FORM E) is to keep track of how much is owed to individual vendors. (See next section)

STRUCTURE

The Accounts Payable Log is a chronological list of invoices received. Basic information on each invoice is noted on receipt, including the date received, supplier, supplier invoice number, invoice amount, and the supplier terms. Two dates are calculated, a save date if discount terms are offered and the due date (after which penalties could apply.) Each entry has two completion entries, the date paid and check number. The Log sheets are maintained in order by sheet number and year in the heading.

CONTENT

The basic data is straightforward. The year is the fiscal year the sheet was begun. The Sheet # is the sequential number of the particular sheet (in order begun). Invoice Received date is the day the invoice (bill) is received. The supplier name is self-explanatory. The invoice number is self-explanatory. The invoice amount is the total amount of the invoice, not including discounts.

The terms may be on the invoice or part of a negotiated agreement. Any agreement on non-standard terms with a supplier should be noted on a formal list and given to the person responsible for the log. If no special agreement exists, note the terms on the invoice. If there are special terms, note the discount and net terms as per the agreement.

The save date is determined by the terms and the date on the invoice. If a discount is available, the date payment is required to get the discount should be noted. The due date is the result of the net terms and the date on the invoice. This date is calculated and entered to allow penalty avoidance. Date paid and check # are self-explanatory.

MAINTAINING THE LOG

The log is begun by noting the year and sheet number one in the heading. To initialize the log, all open invoices are collected in chronological order and noted in the log (oldest first). All entries will have all data completed unless an applicable date has passed. As invoices (bills) are received, they are noted in the log in the next available row. Again all information is completed.

On Monday mornings, draw a line across the sheet under the last entry. This line indicates the invoices to be used to calculate the numbers in the Weekly Cash Position Report. As a sheet is filled, a new one is begun by noting the year and next consecutive sheet number to the top, individual invoice entries then continue from the first line of the new sheet.

NEW FISCAL YEAR

At the end/beginning of a fiscal year, two things are necessary, the accumulation of payables for annual reporting and the opening of a new payables log. The total payables is determined by adding the amount of unpaid invoices. This can be done any time, including year end.

The opening of a new year's log is completed by starting a new sheet with the new year and sheet #1 noted. All of the open invoices remaining from the past year are then transferred to the new sheet(s), (oldest first). After the new sheet and existing payables are noted, maintaining the list is the same as above.

USE OF THE PAYABLES LOG

The primary use of the log is in deciding when and who to pay. The status of an individual bill is obvious, as the dates for payment and whether it has been paid are noted on the log. The available cash and particular terms will determine payment priority.

A secondary use is quick monitoring of payables and aging (if necessary). Finally, a total payables can be determined directly from the first, and the information transferred to the Weekly Cash Position Report (at end of procedure).

VENDOR LOG (FORM E)

The Vendor Log is utilized the same as the Accounts Payable Log, but tracks information in reference to how much is owed to each vendor. The information in the Log is:

Vendor Name
Vendor Address
Vendor Phone Number
Monthly Limit
Date of each transaction
Description of each item purchased
Date of receiving item ordered
Purchase Order Number
Amount of Order
Date of Payments
Amount of Payments
Monthly Balance

This information is kept on a regular basis as is the Accounts Payable Log.

V. ANNUAL CASH PROJECTIONS (FORM F)

Using a 13 column accountants worksheet, you will project out for the year the cash needs for your business. This form can also be used for any bank presentation. It is the same format as FORM F, Monthly Cash Flow Analysis, except you project on a annual basis what your cash needs are going to be by month.

This form is also used to determine your seasonality of your business, and how to effectively handle your low sales months. Using the financial statements from the last twelve months, you can use them as a basis for determining the cash sales and materials expenses. When filling out the rest of the expenses for the year, make assumptions as to what your increased sales efforts will bring in for cash sales and accounts receivables. Also look at each expense item and make the same determination as to what the individual expense will be during each month.

If you see a low sales level due to the seasonality of your business, you need to make plans as to how to cover the expenses during this slow time. This is where it is a good idea to have a Line of Credit at the bank. Using this form will help you and the banker determine the cash needs of the business and how much of a Line Of Credit you need.

CASH POSITION REPORTING

VI. DAILY FLASH REPORT (FORM G)

When your cash situation is consistently not adequate, you need to use the Flash Report. This is a daily cash projection system. When your cash situation improves, it will not be necessary to continue the Daily Projections, but the Cash Flow Analysis will still need to be continued on a regular basis.

The objective of the daily "Flash Report" is to know each day the status of the regular elements which will impact your cash flow.

PREPARATION OF FLASH REPORT

TOTAL DOLLARS RECEIVED - By 10 P.M. each day total all sources of cash received from the previous day (cash, checks, Etc.). This will represent the bank deposit for the day. The deposit MUST be in the bank prior to 1 P.M. to get credit for it that day.

TOTAL CHECKS WRITTEN - Total the dollar amount of all checks written on the previous day and record it on the daily report.

CURRENT BANK BALANCE - Enter on the daily report the current balance in each account after adding all deposits and deducting all checks written by the appropriate account.

TOTAL ACCOUNTS RECEIVABLE - Enter the amount of Accounts Receivable that are outstanding on the first line for each day. On the second line for each day enter the daily total of the payments on accounts receivable that was actually received for the day. On the third line enter the amount of any new credit that was granted for the day. On the first line of the next day will be the cumulative balance of the accounts receivables to date.

TOTAL ACCOUNTS PAYABLE - Enter on the daily report the total of the accounts payable, after deducting all checks written and all invoices received, on the first line. This amount will be the payables owed to date. On the second line put the payables that need to be paid that day. On the third line put the amount of any new invoices received for the day. On the first line of the next day, place the cumulative total of the Accounts Payable to date.

DISTRIBUTION (DAILY)

By noon each day, have the completed report ready for the President to review. Have the invoices, that need to be paid for the day, with this Daily Report.

VII. WEEKLY CASH POSITION REPORTS (FORMS H & I)

The purpose of the Weekly Position Report is to provide the management of the company a tracking device for cash. It will show where the company stands on a weekly basis and will enable management to react quickly to any cash situation, if required. There are two styles of this report. Form H is used for companies with multiple checking accounts. Form I is used where there are no more than two checking accounts, one for operating and one for payroll.

This report will be prepared each Monday morning to be presented to the President by Monday Noon. It is to be dated as of the close of business on Sunday. NOTE: The term weekly refers to the time frame of Monday to Sunday.

PREPARATION OF FORM H : (This report is for companies that have multiple checking accounts.)

BANK ACCOUNTS is showing the banking activities in the different accounts for the week.

BEGINNING BANK BALANCE is the bank balance in each account on the first day of the week.

ADD DEPOSITS is the total amount of deposits that was placed in each account during the week.

ADD TOTAL is the addition of the DEPOSITS to the BEGINNING BANK BALANCE for the week.

LESS CHECKS WRITTEN is the total amount of checks written on each account during the week.

PRESENT BALANCE is the ending back balance after subtracting the CHECKS WRITTEN form the TOTAL.

ACCOUNTS RECEIVABLE is to show the activity in your receivables during the week. It is broken down into:

PREVIOUS BALANCE is the beginning balance on your accounts receivables at the first of the week.

LESS CASH RECEIVED is the amount of cash received from your customers that are paying on past invoices.

ADD INVOICES is the amount of new invoices that were generated and mailed out during the week.

PRESENT BALANCE is the ending balance for the week of the accounts payables. This is calculated by taking the PREVIOUS BALANCE, subtracting the CASH RECEIVED, and adding in INVOICES. Also this number will be used in the next weeks report as the PREVIOUS BALANCE.

ACCOUNTS PAYABLE shows the amount of activity that has taken place in accounts payables during the week.

PREVIOUS BALANCE is the amount of accounts payables outstanding at the beginning of the week.

ADD INVOICES RECEIVED is the amount of bills you have received during the week from vendors that have to be paid.

LESS PAYMENTS MADE is the amount of payments that you have made towards your payables that are outstanding.

CLOSING BALANCE is the amount of payables at the end of the week. This amount is calculated by taking PREVIOUS BALANCE, adding in INVOICES RECEIVED, and subtracting PAYMENTS MADE.

NOTES PAYABLE is the amount of payments that need to be made during the week towards and regular monthly payment loans.

PAST DUE PAYMENTS is where you have not paid on any payments that were due before this week. Hopefully this amount is zero, but if it is not, then you need to do a better job of managing

your money.

PAYMENTS DUE THIS WEEK if where you place the total amount of payments due to be paid this week.

PAYMENTS MADE THIS WEEK is the amount of payments paid during the week.

BALANCE DUE FOR THIS WEEK is the amount that is left over to be paid this week.

SUMMARY is the section of the report that shows the Working Capital Available for use. Working Capital is the amount of cash left over if all of your Accounts Receivable come in and you pay on all of your Accounts and Notes Payable.

REVENUE EARNED PER HOUR is the amount of revenue your labor force is generating per hour. This figure should be at least twice, if not three times, the Payroll Cost Per Hour below. This number is typically calculated on a monthly basis.

MONTHLY SALES. This is the total billings collected and sales for the month (last week) of the report.

DIVIDED BY TOTAL LABOR HOURS. This the amount of labor hours spent during the month to generate the income for the week. This includes all personnel, including the Office Personnel.

EARNED REVENUE PER HOUR. Take the MONTHLY SALES number and divide it by the TOTAL LABOR HOURS. This gives you an idea how much income you are bringing in per hour of labor costs.

PAYROLL COST PER HOUR will give you an idea of how much your total payroll is costing you per working hour. This section of the report is typically only done once a month for a complete months time frame.

TOTAL PAYROLL. This number comes from PAYROLL CHECKS amount in the DISBURSEMENTS section.

DIVIDED BY TOTAL LABOR HOURS. Take the TOTAL PAYROLL and divide it by the TOTAL LABOR HOURS for the week.

COST PER HOUR. This is the cost per hour to generate the income for the week. The EARNED REVENUE PER HOUR should be higher than the COST PER HOUR, or there is some sort of problem that needs to be corrected.

PREPARATIONS OF FORM I - This form is to be used by companies that have only one operating account.

CASH RECEIPTS:

RECEIVED ON ACCOUNT is any payments made from customers that have been on credit accounts.

CASH is any sales for the week that have been paid by cash (checks, etc.) and has not been put on the customers account.

OTHER is any other monies that have been received not from sales, such as from loan proceeds, investor/owner loans/investments.

TOTAL RECEIPTS is the total of the cash received for the week.

CASH DISBURSEMENTS:

PAID ON ACCOUNTS. Sum of all checks issued on invoices that were set up in a prior accounting period or month.

PAYROLL CHECKS. Sum or net payroll checks paid to the employees of the company and federal payroll tax deposits to the bank.

OTHER DISBURSEMENTS. Covers payments other than those above.

TOTAL DISBURSED. Show the range of check numbers included in weekly checks. Add the four lines to arrive at the total.

ACCOUNTS RECEIVABLE: This covers all cash and checks received weekly (Monday to Sunday).

OPENING BALANCE. Use the CLOSING BALANCE A/R from the previous report.

BILLINGS. The sum of all invoice billings issued weekly.

RECEIPTS. Total of all cash and checks received weekly on Accounts Receivable.

CREDITS TAKEN. Any cash discounts that customers have taken for earlier payment on their accounts.

CLOSING BALANCE. Take the Opening Balance, add the new Billings, subtract the Receipts, subtract the Credits, and the difference is the CLOSING BALANCE.

ACCOUNTS PAYABLE: This covers all invoices and other specific charges owed by the business except notes payable.

OPENING BALANCE. The same as the last week's report CLOSING BALANCE.

PURCHASES. Sum of invoices received from vendors. Notes Payable are never included in accounts payable.

PAID ON ACCOUNT. Disbursements made on items set up as Accounts Payable.

CREDITS TAKEN. When paying on the companies accounts payables, if you utilize a cash discount for paying promptly on the account, place the total of this amount for the week here.

CLOSING BALANCE. Starting with the OPENING BALANCE, add PURCHASES, subtract PAID ON ACCOUNT, subtract credits and the difference is the CLOSING BALANCE.

CASH (BANK) BALANCES: This includes only commercial (Company) savings and checking accounts.

OPENING BALANCE. This is self explanatory and is the same as the "Present Balance" of the previous Financial Report. Each successive reporting Opening Balance will be the same as the previous report's closing balance on the Cash Balances section.

DEPOSITS are those made weekly, Monday to Saturday. Add this line to the Opening Balance to arrive at the Sub-Total.

DISBURSEMENTS is the sum of all checks written on the operating checking account through Saturday. This is subtracted from the Sub-Total to arrive at the Present Balance.

CLOSING BALANCE: Starting with OPENING BALANCE, add DEPOSITS, subtract DISBURSEMENTS, and the total will be the CLOSING BALANCE.

PURCHASE ORDERS: is the amount outstanding on orders that you have not received the invoices for. This amount you have to have enough cash in order to pay for them at a future date.

OPENING BALANCE. The same as the last week's report CLOSING BALANCE.

P.O.'S ISSUED: Total of the Purchase Orders Issued for the week.

INVOICED. Amount of any purchases that were place on account.

CLOSING BALANCE. Starting with the OPENING BALANCE, add in P.O.'s issued, subtract and amounts for INVOICES, and the difference is the CLOSING BALANCE.

NOTES/LOANS PAYABLE: Addresses all notes that the business is accountable for.

PAYMENTS DUE. Note payments due the current week of the

report.

PAYMENTS MADE. Any payments made this week on notes and loans.

PAYMENTS PAST DUE. Take the PAYMENTS DUE and subtract the

PAYMENTS MADE for the BALANCE DUE. This figure indicates any

loan payment amounts that are past due.

WORKING CAPITAL. This is a summary of the entire report and shows the present cash position at a glance.

LINE OF CREDIT. Show total amounts for any lines of credit accounts that the company has available.

LINE DRAWN. Any amounts that have been utilized from the line of credit.

LINE AVAILABLE. Take the LINE OF CREDIT amount and subtract the amount from the Line Drawn. This is the amount of money still available to draw on if necessary.

CLOSING CASH BALANCE. Transfer the number from the CLOSING BALANCE in the CASH BALANCE section.

A/R BALANCE. Transfer the number from the CLOSING BALANCE from the ACCOUNTS RECEIVABLE section.

CAPITAL BALANCE. Transfer the number from the LINE AVAILABLE, add the CLOSING CASH BALANCE number, and add the A/R BALANCE numbers together to get a total. This is a number used to indicate how much cash would be available, if you could collect all of the accounts receivable, and other cash that is available.

ACCOUNTS PAYABLE. Transfer the number from the CLOSING BALANCE number from the ACCOUNTS PAYABLE section.

P.O.'S OPEN INVOICE. Transfer the number from the INVOICED number in the PURCHASES section.

NOTES DUE. Transfer the number from BALANCE DUE number in the NOTES/LOANS PAYABLE.

AVAILABLE CAPITAL. Take the CAPITAL BALANCE line, subtract the ACCOUNTS PAYABLE, subtract the P.O.'S OPEN INVOICE number, subtract the NOTES DUE number, and the balance is the AVAILABLE CAPITAL. This number indicates what the company would look like if ALL Account Receivables were collected, and all ACCOUNTS PAYABLES, Purchase Orders (P.O.'s), and NOTES PAYABLES were all paid off, this would indicate the amount of cash available to the company.

INVENTORY is the amount of transactions in your inventory. If you feel that you need to keep a constant track on your inventory, then put this section in your weekly report.

BEGINNING INVENTORY. This is the amount of inventory from last weeks report.

RECEIVED INVENTORY. This is the amount of inventory received this week.

SHIPPED INVENTORY. This is the amount of inventory shipped during the week.

RETURNED INVENTORY. This is the amount of inventory returned back to the manufacturer during the week.

ENDING INVENTORY. This is the amount of inventory left over after receiving, shipping, and returning inventory for the week.

REVENUE EARNED PER HOUR (Same as FORM H)

MONTHLY SALES. This is the total billings collected and sales for the month (last week) of the report.

DIVIDED BY TOTAL LABOR HOURS. This the amount of labor hours spent during the month to generate the income for the week. This includes all personnel, including the Office Personnel.

EARNED REVENUE PER HOUR. Take the MONTHLY SALES number and divide it by the TOTAL LABOR HOURS. This gives yo an idea how much income you are bringing in per hour of labor costs.

PAYROLL COST PER HOUR (Same as FORM H)

TOTAL PAYROLL. This number comes from PAYROLL CHECKS amount in the DISBURSEMENTS section.

DIVIDED BY TOTAL LABOR HOURS. Take the TOTAL PAYROLL and divide it by the TOTAL LABOR HOURS for the week.

SUMMARY

This WEEKLY FINANCIAL SUMMARY REPORTS is designed to give your companies management a better idea, on a weekly basis, where the business is going, in reference to cash management, and financial control.

VIII. MAXIMIZATION OF INTEREST INCOME

Developing a cash flow analysis procedure will enhance the company's management of it's cash flow. By controlling the amount of cash in a particular account, the company can increase it's interest income to the fullest extent possible. Although cash forecasts may be developed for any period of time, it is suggested that it be utilized on a weekly basis, along with the Cash Position Report.

OBJECTIVE:

The purpose of establishing a weekly cash flow projection, is to keep the company's cash in an interest bearing account for the maximum amount of time possible. By keeping only the cash needed from weekly expenditures in the checking account, the excess cash is kept in an account that draws interest for a longer period of time.

PROCEDURE:

Get with your bank and determine if they have a "SWEEP" account available, and if it is the right type of account for you. A SWEEP account is where the bank automatically invests any excess cash in your checking account for the day. As checks come in to be paid, they pay them and at the end of the day they invest the extra cash. If they do not have an SWEEP account, or it is not right for you then have them set up a MONEY MARKET account.

If you are setting up a MONEY MARKET account, deposit all cash and checks in the account at the end of each day. On a weekly basis, write the checks needed to cover all expenditures, and determine the total amount needed to be transferred from the money market account. On the day that the checks are to be issued, transfer the appropriate amount of cash to the company checking account. Write the checks for the payroll account the same.

Transfer as much as possible from the money market account to a higher interest bearing CD for the time frame estimated that the cash is not needed. Any excess cash that is not needed to cover any expenses should be put into a longer term CD to gain the maximum amount of interest. Most banks handle short term CD's and you need to look at their availability and the amount of cash that is not needed right away.

CONCLUSION

The proper management of your cash is no easy task, especially when you are not generating enough cash to cover all your expenses. This system will help you to determine the strategies that are needed to manage your cash, the life blood of your business.

If you are experiencing a cash shortage, then plans need to be made to cover theses expenses, or delay paying them, or reducing your expenses. If you have an excess of cash, then you need to invest it wisely.

Cash management is nothing more than projecting out your cash needs and making plans based on the projections. The format of the reports has been developed for many companies, but you need to develop the format of the reports that work for you. These reports were added to give you an idea of what information is important to track. Good luck in managing your cash better.

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