Cash management Techniques and Short-term financing methods

1 ) Compare and contrast cash management techniques . Use an example to illustrate each

The overall purpose of cash flow managing is to make sure that one has enough cash to pay current bills . Businesses can manage cash flow by examining a cash flow statement and cash flow projection . Basically , the cash flow statement includes

Cash management may concern family and company . In both cases it is necessary to see a cash flow budget ' showing the effect of the project on revenues , and proving that a subject of business project (businessmen ) can

make the anticipated loan payments

Such a budget is creating by means of systematically comparing the costs and financial benefits of the project over a period of time , and will enable to get a good handle on how the project will affect the business This is the only correct cash management technique

Cash flow projection should show estimated cash inflows and outflows for the project , by month , for at least the first year . As a starting point businessmen can use the cash flow projection ' he already done for his business , simply adding in the changes that he expects the project to bring . Then businessmen can compare his original statement (without the project ) to his new statement (with the project , to gauge the likely results of moving forward with his plans

It must be recognized , however , that the farther out in time businessmen go , the less certain his figures will be , because of the increased chances that there will be unexpected changes in interest rates consumer tastes and habits , or other factors that can affect his business

Hence , long-range cash flow projection for the project should include only those inflows and outflows that are directly related to the project itself . It can 't include overhead costs that businessmen would have regardless of whether he did the project or not

Example of a simplified cash flow projection

For example , a businessman is thinking of purchasing a new machine that will allow him to offer a new product to his customers . The machine will cost 100 ,000 to purchase and install , and after five years (when he plans to sell it ) the machine will be worth about 10 ,000 . His facility has plenty of room , so he won 't have any additional rental costs for space , and he can piggyback advertising for the new product on to his existing advertising budget . He will , however , have to pay for insurance , personal property taxes , and a part-time employee to operate the machinery (these items are included in his fixed costs which will materials , supplies , and electricity that will vary depending on the volume of production . These variable costs will amount to about 60 percent of the sales revenues

The following is a simplified example of a projected cash flow statement for the project

Current Year 1 Year 2 Year 3 Year 4 Year 5

Price /Unit

80 84 88 93 97

Multiplied by

Units Sold

1000 1150 1323 1521 1749

Net Sales

80 ,000 96 ,600 116 ,424 141 ,453 169 ,653

Variable Costs

48 ,000 57 ,960 69 ,854 84 ,872 101 ,792

Fixed Costs

12 ,000 12 ,600 13 ,230 13 ,892 14 ,586

Depreciation

14 ,290 24 ,490 17 ,490 12 ,490 8 ,930

Gain /Loss - Equip . Sale 12 ,310

Pre-tax Income

5 ,710 1 ,550 15 ,850 29 ,591 32 ,034

Tax Expense

1 ,941 527 5 ,389 10 ,060 10 ,892

Net Income

3 ,769 1 ,023 10 ,461 19 ,531 21 ,142

Adjustments

Add Back Depreciation

14 ,290 24 ,490 17 ,490 12 ,490 8 ,930

Asset Purchase Salvage Value 100 ,000 10 ,000

Net Cash Flow 100 ,000 18 ,059 25 ,513 27 ,951 32 ,021 40 ,072

The table makes a number of assumptions

The average price of the product will increase by 5 percent a year while the volume sold will increase by 15 percent a year

Depreciation is computed using the IRS 's tables for 7-year property using the half-year convention under MACRS . Tax depreciation is used because it affects the outflow of cash in the form of tax payments

Fixed costs will increase by an inflation factor of 5 percent a year

The tax rate is calculated at 34 percent

2 ) Compare and contrast short-term financing methods . Use an example to illustrate each method

Financing is more likely to be required in exporting than in domestic transactions because the time between production and payment is normally greater for exports . As an exporter , businessmen should be familiar with various options for financing transactions , as well as strategies to ensure protection from nonperformance of foreign buyers

Businessmen can be paid by a variety of means . Four common short-term financing methods , ranked from least risky to most risky , are as follows

Cash in Advance

Cash in advance is the most secure option , since it eliminates all risk of nonpayment and enhances working capital . Currently , few foreign buyers are willing to pay full cash in advance

Letters of Credit

Letters of credit provide a measure of security to both the exporter and importer because banks are relied on to receive and check shipping documents and guarantee payment . By specifying particular terms , a letter of credit can allow the costs of financing a transaction to be borne by either the exporter or importer

There are two forms of letters of credit : confirmed and unconfirmed . A confirmed letter of credit carries a guarantee by an American bank to pay against a letter of credit issued by a foreign bank . Confirmed letters of credit protect exporters against the risk of nonpayment . The most secure form of payment is a letter of credit that is both confirmed and irrevocable

Documentary Credits and Collections

Exporters can also make use of sight (immediate ) and term (deferred documentary credits . A documentary credit calling for a sight draft means that the exporter is entitled to receive payment on sight , i .e upon presentation of the draft to the bank . A term documentary credit may allow for payments to be made over terms of 30 , 60 , or 90 days or at some specified future date

In a collection , the exporter ships goods to an importer and forwards the shipping documents to a collecting bank , which obtains payment from the importer in exchange for the documents . A collection is different from a letter of credit in that the exporter remains exposed to credit risks associated with the importer because no bank has undertaken in advance to pay the exporter upon presentation of the documents . By using a bank as an intermediary , the exporter keeps title to the goods until payment is received or the importer issues a formalized promise to pay It is important to note that the exporter must still rely on the importer to proceed with the transaction and is exposed to possible losses from the time the goods are shipped until payment is received Under collection terms , the exporter is also required to finance the shipment at least until the importer receives the goods and sometimes longer if a term draft is used

Open Account

Open account terms require the exporter both to ship goods and pass title to the importer before payment is made

Exporters have several options to finance export sales . Funds can be borrowed from a bank or other financial institution . Short-term credits or export financing may be available through government programs such as the export credit programs offered through the agencies such as the Export-Import Bank or the Department of Commerce

In shipping documentation , 13 terms are internationally accepted and understood . Called INCOTERMS (International Commercial Terms , they are internationally validated and were updated in 2000 . These terms delineate the points of sale , origin , destination , and the party responsible under different conditions . Using these terms , it can be specified exactly which party has responsibility for the cargo , shows the point at which that responsibility transfers from the buyer to the seller , and identifies the seller and buyer costs

Reference

CCH Business Owner 's Toolkit Develop a Cash Flow Statement . Retrieved Nov . 7 , 2006

from HYPERLINK "http /www .toolkit .cch .com /text /P06_6400 .asp http /www .toolkit .cch .com /text /P06_6400 .asp

Financing Export Transactions . Retrieved Nov . 7 , 2006 from

HYPERLINK "http /www .paagproducts .org /financing .html http /www .paagproducts .org /financing .html ...