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Cash Management Basics

October 7, 2009

2009 | By E-Myth Business Blog

Do you know how much cash you have? Do you know how that cash flows through your business?

The amount of cash you have on hand is one of the most important metrics for the growth and survival of your company. As a business owner three of your primary financial responsibilities are:

  • Being aware of the business’ cash position
  • Actively guiding the business towards attaining more cash
  • Maximizing the return on cash reserves

To put it simply, you need to know where your cash is, plan its path through the business and how to make the most of every dollar.

Think of cash as the fuel that runs your business. Lacking cash can leave you stranded on the side of the road while the competition zooms by. A business, like a car, won’t go anywhere without fuel. The last thing you want is to be walking for miles with that gas can in your hand.

Accordingly, you must be aware of how much fuel you have in your tank at any time. You must understand the efficiency in which your business is burning it, where your next fill-up is coming from, and how well your reserves are performing. How do you monitor all this? By implementing an effective cash management system; which forms a part of every well managed company’s financial controls.

A Cash Control System

Managing this vital component requires the use of simple, well-documented control systems for the money flowing through the business. It needn’t be an overly complex system, but it must cover two categories: money coming in and money going out.

Money coming into the business includes:

  • Sales Receipts
  • Cash Handling
  • Credit Transactions
  • Invoicing and Accounts Receivable
  • Collections

 Money going out of the business includes:

  • Purchasing
  • Accounts Payable
  • Inventory Control
  • Payroll

Keeping the Cash Flowing In Every Stage of Business

The complexity of your cash management systems will depend on your business’ stage of development.  

In the infancy or young stage of a business, you’re likely to experience periods of growth. Your cash is cycled from revenue to expense very quickly during this time, allowing just enough cash flow to add resources or fulfill demand. If at any point during this stage, there is a major cash shortage, you could be in big trouble. Your cash management system provides an early detection system for such events and allows you to make adjustments before it’s too late.

As your business matures, your cash management priorities shift slightly from a purely internal perspective to a more balanced internal and external focus. Cash on hand and meeting the day-to-day needs of your business is always top priority, but cash is too valuable to be sitting around doing nothing. Businesses with cash reserves can create competitive advantages through joint ventures, acquisitions, research and development, traditional savings and smart investments. While many of these activities may seem more likely for large public corporations, by focusing your efforts in a similar fashion, cash savvy small companies can leverage their cash position as a competitive strategy.

Where do you start?

The fastest way to get your cash and related money management systems in place is to perform a quick audit of your current systems. From there you can create an action plan to get from where you are, to where you need to be.

Begin by assigning a performance score to rank each component of your cash system according to how well it meets its intended goal After you’ve scored each component, or sub-system, prioritize the list in terms of relevancy and urgency. This becomes your development plan for making improvements.

For example, a retail client of mine recently set up a ranking system from -10 to +10, and ranked her cash management systems as follows:

  • Sales Receipts +10
  • Cash Handling +10
  • Credit Transactions 0
  • Invoicing and Accounts Receivable -5
  • Collections -10
  • Purchasing -10
  • Accounts Payable 0
  • Inventory Control  -5
  • Payroll +10

After a careful consideration of which systems would affect her cash flow fastest she prioritized her system development as follows: inventory control, invoicing and accounts receivable, credit transactions, collections, purchasing and accounts payable. This simple step gave her a clear path towards improving all her cash management systems. Of course, each business is different, but this same ranking system and prioritizing your development will lead to the same result my client achieved: a feeling of comfort and calmness, as she experienced a sense of control over all areas of her cash systems.

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