Business Management

Do you have strong cash management?

Poor management is the main reason for business failure and poor cash management is among the most frequent contributors to failures. Managers need to understand the basic concepts of cash flow and how to plan for unforeseen problems that are often faced in business.

Cash vs. cash flow

Cash is ready money in the bank or in the business. It is not inventory, accounts receivable, and it is not property. These can potentially be converted to cash, but can't be used to pay suppliers, rent, or employees.

Profit growth does not necessarily mean more cash on hand. Profit is the amount of money you make over a given period of time, while cash is what you must have on hand to keep your business running. Over time, a company's profits are of little value if they are not accompanied by positive net cash flow. You can't spend profit; you can only spend cash. Watching the cash inflows and outflows is one of the most pressing management tasks for any business.

Positive Cash Flow

If its cash inflow exceeds the outflow, a company has a positive cash flow. A positive cash flow is a good sign of financial health, but is by no means the only one.

Negative Cash Flow

If its cash outflow exceeds the inflow, a company has a negative cash flow. Reasons for negative cash flow include too much or obsolete inventory and poor collections on accounts receivable (what your customers owe you). If the company can't borrow additional cash at this point, it may be in serious trouble.

Practice Good Cash Flow Management

·       Good cash management is simple. It involves:

·       Knowing when, where, and how your cash needs will occur

·       Knowing the best sources for meeting additional cash needs

Being prepared to meet these needs when they occur, by keeping good relationships with bankers and other creditors

The starting point for good cash flow management is developing a cash flow projection. Smart business owners know how to develop both short-term (weekly, monthly) cash flow projections to help them manage daily cash, and long-term (annual, 3-5 year) cash flow projections to help them develop the necessary capital strategy to meet their business needs. They also prepare and use historical cash flow statements to understand how they used money in the past.