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Cash Flow For Dummies

ISBN: 978-1-118-01850-7
384 pages
November 2011
Cash Flow For Dummies (1118018508) cover image
The fast and easy way to grasp cash flow management

Cash Flow For Dummies offers small business owners, accountants, prospective entrepreneurs, and others responsible for cash management an informational manual to cash flow basics and proven success strategies. Cash Flow For Dummies is an essential guide to effective strategies that will make your business more appealing on the market. Loaded with valuable tips and techniques, it teaches individuals and companies the ins and outs of maximizing cash flow, the fundamentals of cash management, and how it affects the quality of a company's earnings.

Cash flow is the movement of cash into or out of a business, project, or financial product. It is usually measured during a specified, finite period of time, and can be used to measure rates of return, actual liquidity, real profits, and to evaluate the quality of investments. Cash Flow For Dummies gives you an understanding of the basic principles of cash management and its core principles to facilitate small business success.

  • Covers how to read cash flow statements
  • Illustrates how cash balances are analyzed and monitored—including internal controls over cash receipts and disbursements, plus bank account reconciliation and activity analysis
  • Tips on how to avoid the pitfalls of granting credit—evaluating customer credit, sources of credit information, and overall credit policy
  • Advice on how to prevent fraud and waste
  • Covers cash-generating tactics when doing business with dot-coms, other start-ups, and bankrupt customers

Cash Flow For Dummies is an easy-to-understand guide that covers all of these essentials for success and more.

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Introduction 1

Part I: Fitting Cash Flow into the Big Picture of Running a Business 7

Chapter 1: Getting in Sync with the Rhythm of Cash 9

Chapter 2: Why Accrual Accounting Is Essential 23

Chapter 3: The Big Three Financial Statements 37

Chapter 4: Getting a Grip on the Statement of Cash Flows 59

Part II: Using Financial Statements to Assess Cash Health 81

Chapter 5: Mining the Balance Sheet for Cash 83

Chapter 6: Digging Deeper into Cash Flow 113

Chapter 7: Understanding Liquidity versus Available Cash 131

Part III: Getting Intimate with Your Company's Cash Flow Needs 157

Chapter 8: Creating a Business Plan to Secure Cash 159

Chapter 9: Building Best-in-Class Projection Models to Manage Cash 173

Chapter 10: Identifying and Securing External Sources of Capital 193

Chapter 11: Knowing When to Use Debt to Finance Your Business 213

Part IV: Managing Your Business with Cash Flow in Mind 239

Chapter 12: Covering the Basics of Cash and Cash Activity 241

Chapter 13: Preventing Cash Losses from Embezzlement and Fraud 267

Chapter 14: Managing the Selling Cycle to Improve Cash Flows 281

Chapter 15: Managing the Disbursement Cycle to Improve Cash Flows 311

Part V: The Part of Tens 331

Chapter 16: Ten Keys to Managing Cash Flows in a Small Business 333

Chapter 17: Ten Tales of Cash-Flow Woes 341

Index 351

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Tage C. Tracy is principal owner of TMK & Associates, an accounting, financial, and strategic business planning consulting firm.

John A. Tracy is Professor of Accounting at the University of Colorado in Boulder and the author of Accounting For Dummies.

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December 13, 2011
Staying in the Money: Ten Ways to Keep Cash Flow Problems from Putting You Out of Business

Every small business owner knows the trouble that comes with managing the ins and outs (pun intended!) of cash flow. You can have tons of loyal customers and be an expert at getting new business and still be kept awake at night with cash flow worries. Authors Tage Tracy and John A. Tracy commiserate. They know cash flow is an issue that can send good businesses to their graves.

“Cash flow problems have a habit of sneaking up on a business, especially in a rocky economy,” says Tage Tracy, coauthor of along with John A. Tracy of Cash Flow For Dummies® (Wiley, 2011, ISBN: 978-1-1180-1850-7, $26.99). “If a business is earning a profit, many business managers simply assume that cash flow is satisfactory. But even if profit is good, cash flow can be bad.”

Cash flows pose an unending challenge to business owners and managers because they have to be carefully managed. Read on to learn what you can do to make 2012 the year of the cash flow reboot for your business.

Respect and understand financial statements. According to some surveys, 25 percent of businesses don’t even maintain accounting records (let alone produce financial statements).

“The bottom line for small business owners is simple,” says Tracy. “If you don’t make an effort to prepare, review, and completely understand your financial statements, then you need to ask yourself why you’re in business in the first place. And this especially holds true for the statement of cash flows, because an abundance of invaluable information is available from this most commonly overlooked and mismanaged financial statement.”

Plan, do projections, and plan some more. Proper planning is essential to the launch, growth, management, and ultimate success of your business as measured by the ability to generate profits and, just as important, to avoid running out of cash. “According to Tracy, “Having access to sound financial plans structured for different operating scenarios is an absolute must.”

Focus on capital and cash—the lifeblood of your business. One of the most common reasons small businesses fail is that they lack adequate cash or capital, not only to survive difficult times, but also to prosper during growth opportunities.

“Remember, one of the greatest losses a small business can realize is that of lost opportunity, which has its roots in not being prepared to properly capitalize on market opportunities,” explains Tracy. “The harsh reality is that this great loss is never accounted for or presented in any way, shape, or form on the business’s financial statements. Rather, missed market and business opportunities lurk in the torturous thought, ‘Imagine what I could have achieved!’”

Understand your selling cycle. The length of the complete selling cycle is often much longer than the aspiring entrepreneur projects and/or wants to believe.

“The selling cycle in its entirety spans the time from the very start of the process when a product or service is first visualized and developed to supporting customers after the sale and developing additional products or services that may be in demand,” says Tracy. “And if not properly managed, the selling cycle generally becomes of one of the largest consumers of cash in a business. Without fail, almost every aspiring business owner, at one point or another, will experience delays in the selling cycle.”

Manage your disbursements cycle. To counteract the selling cycle cash consumption machine, businesses need to understand that the disbursement cycle (managing expenditures and cash payments to vendors, employees, and other creditors) can be leveraged and managed to be a primary source of cash for your business.

“Invoke what’s called the matching principle,” advises Tracy. “That is, similar to properly matching revenue and expenses to ensure that an accurate measurement of a business’s profit or loss is obtained, you should be able to match cash inflows and outflows.”

Be creative to generate cash. The following three areas offer significant opportunities for creativity when looking to improve cash flows:

  • Turn your assets over quicker. The quicker you can turn over assets, the quicker they turn into cash. It’s as simple as that.
  • Leverage your vendors, suppliers, and financing sources. They don’t want to lose your business, so placing just the right amount of leverage on these groups can result in enhanced cash flows because liabilities offer a source of cash.
  • Manage external sources of cash proactively. Proactively manage your relationships with banks, leasing companies, and even the federal government to ensure that cash is made available when needed.

Balance the balance sheet. Many businesses overlook the concept of properly managing the financial structure of their balance sheet, which has gotten more than a few businesses in trouble.

“Your business needs to strike a proper balance between making sure that current assets are financed or supported with current liabilities,” notes Tracy, “and making sure that long-term assets are financed or supported with long-term sources of capital such as a five-year note payable or equity. Every business should strive to achieve a financial condition that ensures constant maintenance of adequate levels of both solvency—the ability to pay all just debts—and liquidity—the ability to quickly access cash to support business operations.”

Understand external capital markets.  When it comes to external capital markets, think well ahead. In today’s economic climate, it takes a long time to identify external sources of capital and to secure them. So plan well ahead to make sure that you’ll have cash available when needed, because it’s not a process you can rush.

Protect cash at all times. Cash has a very unique characteristic unlike other assets that makes it highly susceptible to additional risk of loss: Cash is an extremely liquid and marketable asset.

Always think of CART. CART equals complete, accurate, reliable and timely. Your company’s financial and accounting information system needs to produce complete, accurate, reliable and timely financial information, reports, data and so on, which management can use to make informed business decisions.

“When you have the proper systems in place and know what to look for, you can keep cash flowing, helping you to grow a successful business,” says Tracy. “Let 2012 be the year you replace a renewed focus on properly managing your cash flows.”

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