Cash Management Best Practices

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Cash Management Best Practices

Many business owners are very good at performing the main or essential functions of their business. They provide an excellent product or excellent service; however, many do not spend time on financial planning or budgeting or on long and short term planning. Basic cash management techniques and financial strategies can be employed by business owners to keep track of the dollars involved in their businesses.  There is great benefit in knowing how to record and handle the finances to ensure a business is profitable. Cash management is particularly important for new and growing businesses. Lack of cash can be a problem even when a business has numerous clients and plenty of sales. The real problems come in finding the funds for innovation or expansion or covering the expense of the next big sale. Cash management is not something that can be easily obtained or easily controlled. It requires a certain disciplined and organized approach. Certain key metrics should be monitored in order to positively management results.

One of the first cash management techniques a business owner should try is expense tracking; an owner should be monitoring all outgoing money.  How much does it really cost to acquire a new customer? To fulfill an order?  To supply a service?  Business owners should know the costs of supplies, and employees’ salaries and benefits, and lunch meetings and to allocate those expenses against sales.  Recording every cent that goes out will help a business understand its actual profit, and help eliminate unnecessary costs.  Are you watching every dollar going out of the business?  Can you buy used equipment instead of new?

Accounts receivable should also be tracked. Keeping a record of incoming money and when the next round of incoming money is due will help regulate cash flow by allowing an owner to reminding any debtors that payment is due.  It also keeps the business operation on a regular schedule for supply purchases based on when dollars are received or will be received. Get to know your customers beyond what they order from you. Look for steps that you can take to make it easier for them to pay you.  The faster you can turn an invoice into cash, the better for your business and the better for managing your cash. Are there steps you can take to make it easier for your customers to get payment to you?

Business owner should take steps to ensure they are managing cash to the best of their ability.  The first steps to take include the following:

  • Make sure your business has on-line access, or mobile access.  This is an important step in monitoring the cash in and out of the company (as mentioned above) and important for watching for fraud and bank fees.  Many small businesses do not have on-line access and those businesses are missing a key tool in managing cash flow.
  • Make sure you are in the correct business account.  Talk with your banker and make sure that the account you have matches the transactions that are coming through the account.  The costs of many accounts are subject to the amount of transactions.  You might also want to check with another bank every so often to make sure that there are not better alternatives.
  • If possible make daily deposits.  Many business owners sit on a check to deposit “when they head toward the bank.”  A check may sit in the office for a few days or in the car for a few days.  This presents the potential for lost interest earned, fraud, and loss of cash.
  • Lastly, don’t manage cash by paying a bill as soon as cash comes in.  Even though you may have available cash, you may want to wait to pay a bill until it is due.  This can help build your average account balance which can help offset bank fees.  If your bank offers interest bearing business accounts, holding the cash longer can help earn more interest.  Make sure you are taking advantage of available discounts offered by supplier but if there is no other incentive to pay a bill early you may want to keep the cash in your hands as long as possible.

In every type of business it is critical to manage cash flow properly.  Without appropriate cash flow management, businesses can run short of cash when it’s most needed.  It can be disaster for a business when unable to pay a supplier, pay employees, or fund the next big sale.  Fortunately, there are a number of easy steps companies can use to monitor cash flow and keep the business running efficiently.

Wesley Shie

Wes Shie joined the staff of the Northeast ISBDC as a business advisor in November of 2010 and has served as the Regional Director since October 2014. He came to the center with years of experience in banking and financial services, having worked as a relationship manager for Wells Fargo and Chase Bank in the past. Shie also served as a finance specialist for the Community Development Corporation (CDC) of Fort Wayne prior to working in commercial banking. The Fort Wayne native is a graduate of Northrop High School and Indiana University-Purdue University Fort Wayne (IPFW), where he received a Bachelor of Science degree in Organizational Leadership and Supervision with a minor in General Business in 1995.
Wesley Shie can be reached at wshie@isbdc.org.
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