Chapter 13: Cash

the most basic money management skill

a bank reconciliation

bearer

any person or business entity who possesses a security

the method of theft by which the greatest dollar loss occurs

embezzlement (usually happens in your accounting office)

the vast majority of business theft is committed by...

employees

statement of cash flows

essentially a restatement of the cash budget, but with the cash coming into/out of your business placed into the categories of cash from operations, investing, and financing

the most prevalent method of theft

skimming (usually done at the point of sale)

strategies to handle cash shortages

use personal money borrow adjust scheduled purchases adjust scheduled payments try to collect money due sell investments sell receivables lay off employees

gaming the payment process

using methods to appear to be paying bills on time, when in fact payment is being delayed or avoided

the three sources of cash

1) cash flow from operations 2) cash flow from investing 3) cash flow from financing

the three primary causes of cash flow problems

1) difficulty collecting money due from customers 2) seasonal variation in sales 3) unexpected decreases in sales

how to protect cash from being stolen

1) hire honest and ethical people (do thorough pre-employment background checks) periodic credit checks on employees identify opportunities for employees to steal separate duties investigate budget variances carefully conduct a formal audit implement a formal statement of ethics policies provide coaching/counseling/training to employees terminate employees who do not maintain the standard provide education about the economics of your business to employees

the most common means by which employees steal cash from their empoyers

1) larceny and embezzlement (steeling cash after it has been received and recorded in your books) 2) skimming (steeling cash before it has been recorded in your books) 3) phony disbursements

techniques to decrease cash outflows

1) make good purchasing decisions (appropriate quantities with the appropriate quality at the appropriate times) 2) avoid waste trade discounts non-cash employee incentives use of temporary agencies consignment barter control of the timing of paying out cash negotiation of terms with suppliers timing of purchases gaming of the payment process

the three purposes of money

1) to facilitate exchanges of unlike assets, i.e. your labor for a grocer's food 2) to measure the value of things, both tangible and intangible 3) to keep track of wealth

the simple cash flow problem

1) too little money coming into the business and 2) too much money flowing out

approximately how many small businesses that fail do so because of cash flow problems?

90 percent

growth trap

a financial crisis that is caused by a business growing faster than it can be financed (growing will produce more money, but right now you need money to grow)

timing purchases

a method of controlling the timing of cash outflows that is invisible to suppliers and vendors

overdraft

a negative balance in a depositor's bank account (available balance < withdrawal < ledger balance)

discounts for prompt payment

a reduction in sales price provided to credit customers for paying outstanding amounts in a timely manner

cash disbursements budgets

a schedule of the amounts and timings of payments of cash out of a business

cash receipts budget

a schedule of the amounts and timings of the receipt of cash into a business (useful for when you provide credit to your customers)

how many small businesses experience money problems?

almost two-thirds

payables

amounts owed to vendors for merchandise or services purchased on credit

receivables

amounts owed to your business for merchandise that you sold on credit

money

an accepted medium of exchange

reconciling

an accounting process that identifies the causes of all differences between book and bank balances

clearinghouse

an entity that processes checks and electronic fund transfers for banks and other financial organizations

short-term debt

any debt that must be paid in less than one year from the date of the financial statement on which it is reported

cash equivalents

assets that may be quickly converted to cash (marketable securities, commercial paper, current debt investments)

why is cash flow management a problem for small businesses?

because of the difficulty of matching the timing of the receipt of cash to the timing of the need to expend cash

factoring receivables

borrowing money secured by a firm's accounts receivable (a method of borrowing against receivables; most expensive method)

deposits and progress payments

cash payments received before product is completed or delivered

the balance of the company's cash account and the balance the bank shows for the company's account are almost always...

different from each other (because of the difference in timing and amount of entries made into the business accounting program, and the actual deposits received and disbursements made by the bank)

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

the essence of money

it is a form of information, accepted by the community

demand deposits

money held in checking and savings accounts (demand = how bankers say withdraw)

cash

money that is immediately available to be spent (currency, demand deposits, and traveler's checks)

are profits money?

no - they are information that is useful in predicting when and how much money you may collect

commercial paper

notes issued by creditworthy corporations

trade discounts

percentage of discounts from gross invoice amounts provided to encourage prompt payment

cash flow management

planning and tracking the amounts and timing of money to be received and paid during the business cycle

non-core projects

revenue-producing tasks and activities related to, but not part of, the primary strategy of a business

non-cash incentives

rewards that do not require payment of cash (stock options, compensating time off, or added vacation days)

comprehensive budget

sets of budgets that detail all projected receipts and spending for the budget period (aka a master budget)

revenues and expenses are...

solely accounting concepts that are used to predict the amounts and timings of cash flows primarily through the budgeting process, which starts with forecasting sales and ends in a cash budget

marketable securities

stocks and bonds that are traded on an open market

techniques to increase cash flows

taking deposits and progress payments offering discounts for prompt payment asking for your money taking on non-core paying projects factoring receivables

currency

the bills and coins printed by governments to represent money

consignment

the practice of accepting goods for resale, without taking ownership of them and without being responsible to pay prior to their being sold (the norm for art galleries)

barter

the practice of trading goods and services without the use of money

company book balance

the sum of cash inflows and cash outflows recorded in the firm's accounting records

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 (can vary significantly from the bank ledger balance)

operating 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 (aka cash-to-cash cycle)

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 (aka operating cycle)