Cash and Receivables in Business

• Cash and Receivables are essential for reporting and analysis in business.

What is Cash?

• Cash is the lifeblood of any business
• Cash is the most common asset
• Cash is the basis for measuring and accounting
• Cash is the most liquid asset
• Cash can easily be transferred

Increase or Decrease in Cash

• Cash sales increase cash
• Loan repayments decrease cash
• Payment for investment in PPE decreases cash
• Collection from credit sales increases cash
• Disbursement for business expenses decreases cash
• Proceeds from loans increase cash

Business Transactions & Cash:

• Almost every business transaction eventually results in an inflow or outflow of cash.
• Cash is at the heart of the business as it impacts a number of income statement and balance sheet accounts.

Cash and Major Accounting Transactions

• Cash transactions can be categorized into operating, investing and financing activities.

Operating Activities include:

• Receipts from customers
• Interest received
• Dividends received
• Payments to suppliers and employees
• Interest paid
• Taxes paid

Investing Activities include:

• Sale of other businesses
• Receipt of loan payments
• Sale of property, plant and equipment
• Purchase of property, plant and equipment
• Making loan repayments
• Purchase of other businesses

Financing Activities include:

• Payment of dividends
• Borrowing cash
• Repaying borrowed cash
• Proceeds from issuing shares
• Payments to acquire or redeem the entity's shares

Classification of Cash Flows:

• Operating Activities
• Investing Activities
• Financing Activities

Operating Activities

• Operating activities include the cash effects of transactions that create revenues and expenses.
• They thus enter into the determination of net income.

Operating Activities have Inflows from:

• Sale of goods or services
• Interest and dividends received

Operating Activities have Outflows to:

• Suppliers for inventory
• Employees for services
• Government for taxes
• Lenders for interest
• Others for expenses

Investing Activities

• Investing activities include (a) acquiring and disposing of investments and property, plant, and equipment, and (b) lending money and collecting the loans.

Investing Activities have Inflows from:

• Sale of property, plant and equipment
• Sale of investments in debt or equity securities of other entities
• Collection of principal on loans to other entities

Investing Activities have Outflows from:

• Purchase of property, plant, and equipment
• Purchase of investments in debt or equity securities of other entities
• Making loans to other entities

Financing Activities

• Financing activities include (a) obtaining cash from issuing debt and repaying the amounts borrowed, and (b) obtaining cash from shareholders, repurchasing shares, and paying dividends.

Financing Activities have Inflows from:

• Sale of ordinary shares
• Issuance of long-term debt (bonds and notes)

Financing Activities have Outflows to:

• Shareholders as dividends
• Redeem long-term debt or reacquire ordinary shares (treasury shares)

Classifying Activities:

• Operating Activities involve Income Statement items.
• Investing Activities involve cash flows resulting from changes in investments and non-current asset items.
• Financing Activities involve cash flows resulting from changes in non-current liability and equity items.
• Operating activities are the most important category of cash flows showing the cash provided by company operations.
• This source of cash is generally considered to be the best measure of a company's ability to generate sufficient cash to continue as a going concern.

Safeguarding Cash:

• Cash is readily convertible to any other type of asset.
• Cash is an asset most susceptible to misappropriation and is easily concealed.
• Recording errors can occur due to volume of transactions.

Internal Control over Cash Receipts

• Establishment of responsibility: Only designated personnel (cashiers) are authorised to handle cash receipts.
• Segregation of duties: Different individuals receive cash, record cash receipts and hold the cash.
• Documentation procedures: Use remittance advice (mail receipts), cash register tapes and deposit slips, or sequentially ordered electronic receipt numbers.
• Physical, mechanical and electronic controls: Store cash in safes and bank vaults; limit access to storage areas; bank cash frequently; use cash registers or have customers use direct deposits to the bank account or electronic funds transfer.
• Independent internal verification: Supervisors count cash receipts daily, banking clerk compares total receipts with bank deposits daily, and accounting records with bank records on a regular basis (bank reconciliation).

Cash Management:

• Many businesses struggle, not because they can't generate sales, but because they can't manage their cash.
• 82% of small businesses fail due to Poor cash flow management skills/poor understanding of cash flow
• 79% of small businesses fail due to starting out with too little money
• 78% of small businesses fail due to lack of well-developed business plan, including insufficient research on the business before starting it
• 77% of small businesses fail due to not pricing properly or failure to include all necessary items when setting prices
• 73% of small businesses fail due to being overly optimistic about achievable sales, money required, and about what needs to be done to be successful
• 70% of small businesses fail due to not recognizing or ignoring what they don't do well and not seeking help from those who do
• A retail business buys inventory, sells it, and receives cash or accounts receivable.
• Basic Principles of Cash Management:
• Increase the speed of collection of receivables
• Keep inventory levels low
• Don't pay earlier than necessary
• Plan the timing of major expenditures
• Invest idle cash

Assessing Cash Adequacy

• One measure of the adequacy of cash is the ratio of cash to daily cash expenses.
• In this ratio, 'cash' includes cash plus cash equivalents.
• It calculates the number of days of cash expenses the cash on hand can cover.
• Cash to Daily Cash Expense Ratio = Cash / Average Daily Cash Expense
• The ratio of cash to daily cash expenses is a short-term measure of the adequacy of cash.
• It ignores other cash outgoings, such as loan repayments, the timing of cash flows and access to financing facilities, such as an overdraft facility or borrowings.
• Liquidity and solvency ratios may be a more appropriate measure for longer term measures.
• The cash to daily expenses ratio provides management and external users such as shareholders some insight into the entity's ability to cover its daily expenditure.

Cash to Daily Cash Expenses Ratio - Decision-Making:

• LOW: need further investigation to avert potential liquidity issues.
• VERY HIGH: have excessive cash held and should consider alternative investment opportunities to maximize the returns on any cash in surplus of its daily needs.