SRT510 Business Case Studies

Business Cash Flow Cycle

Cash Flow Cycle

Inventory

Cash

Fixed Assets

AccountsReceivable

Buy

Make/Sell Sell on Credit

Collect CreditOwed

Buy/Make

SellForCash

“Other Stuff”

Company: Charlene’s Cakes

Charlene’s Cakes

Note: This example is typical, but VERY SIMPLIFIED (and very sad)

Charlene’s Cakes sells cakes to bakeries, catering companies, and wedding planners.

Customers are billed on receipt of cakes and have 15 days in which to pay.

Charlene’s Cakes—Cash OUT

Charlene’s Cakes owes $30K of a startup loan. Monthly loan payments to the bank are $1K

Cake supplies must be purchased Equipment & delivery vehicles must be

maintained/replaced as required 3 employees must be paid ($4.5K per month) Rent/gas/water/hydro of $2K per month

must be paid

Charlene’s Cakes—Cash IN

Cash sales and deposits Customers pay their tabs Money from loans

Date Event Cash In Cash Out

June 1 Startup Loan--$30K $30K

June 1 Rent + Utilities $2K

June 2 Purchased cake materials $5K

June 3 Purchased equipment plus used delivery vehicle

$25K

June 30 Cash sales + deposits for month

$4K

June 30 Sales made but not yet paid (accounts receivable): $10,000

June 30 Payroll $4.5K

June 30 Cash Balance End of month balance: $34K - $36.5K =(2.5K)

Date Event Cash In Cash Out

Starting cash balance ($2.5K)

July 1 Rent + Utilities $2K

July 1 Loan Payment $1K

July 3 Purchased cake materials $3K

July 31 Accounts Receivables “realized” this month (money owed by customers was paid)

$10K

July 31 Cash sales + deposits for month

$4K

July 31 Accounts receivable: $6K new sales

July 31 Payroll $4.5K

July 31 Cash Balance End of month balance: $11.5K – 10.5K = $1K

LATE

LATE

Date Event Cash In Cash Out

Starting cash balance $1K

Aug 1 Rent + Utilities $2K

Aug 1 Loan Payment $1K

Aug 3 Purchased cake materials $5K

Aug 20 Delivery Truck Repairs $4.5K

Aug 31 Accounts Receivables “realized” this month

$3K

Aug 30 Cash sales + deposits for month

$6K

Aug 31 Accounts receivable: $12K + $3K still outstanding = $15K***Bad news! Two customers declared bankruptcy -- $3K worth of sales will never be realized.This means new value of accounts receivable =$12K

Aug 31 Payroll $4.5K

Aug 31 Cash Balance End of month balance: $10K – $17K = ($7K)

LATE

LATE

Date Event Cash In Cash Out

Starting cash balance ($7K)

Sep 1 Rent + Utilities $2K

Sep 1 Loan Payment $1K

Sep 5 BANK says: “your payments were late the last 2 months, you missed a payment this month, your rent is in arrears, you are a new business in a shaky state; we are calling back our loan”.

Charlene’s Cakes says: “We don’t have the cash and no one will lend to us”

Bank says: “You are out of business. We will take your assets: your equipment and your truck ($25K-depreciation) and your accounts receivables ($12K).”

The landlord is probably out of luck.The employees are out of a job.

NOT MADE

NOT MADE

Concepts

Accounts Receivable (A/R)—money that customers owe you (sales made but not yet paid)

Accounts Payable (A/P)—money that you owe suppliers.

A/P Example

Your business purchases raw materials for $10K from company X. Payment terms are “pay within 60 days”.

Your A/P balance is $10K. If you pay the $10K your A/P balance will

be $0K until you buy something else from another supplier.

A/P

Even if your business has the cash to pay off it’s A/P, it may choose not to do so until the last minute so that it can use that money for other things.