Cash Management is a broad-based expression that covers a number of activities that aid individuals and businesses to process receipts and payments in a methodical and proficient way. Positive cash flow does not happen by accident; it happens because a well-defined financial management technique called “cash management” is functioning. A good cash management system helps to efficiently and effectively manage the activities that produce cash. Maintaining an optimal level of cash that is neither excessive, nor deficient is of the upmost importance. Accelerating cash inflows wherever possible is a mandatory practice, even to the extent of getting a commercial bridge loan.
Managing your cash flow is vital for company’s survival and growth. The aim is to administer the cash balances of a company in a manner that optimizes the accessibility of money without running the risk of insolvency. Aspects that should be scrutinized in a money management system should include the administration of cash balances, the business’s level of liquidity and its investment tactics.
In many ways the administration of cash flow is a vital part of a business manager’s job. Should a company be deficient in cash at the time an obligation falls due, the company becomes insolvent and there is a very real risk of bankruptcy. Such a threat should serve to motivate businesses to administer their money carefully.
Cash management carried out effectively can not only prevent bankruptcy, but can increase profitability. It is to be expected that companies incur expenses in the production of goods or the provision of services prior to payment being received from the clients who eventually receive those goods or services. At the same time employees’ wages and other outgoings will deplete significant funds. Such issues make efficient money management essential for the success of any company.
In times of economic recession, falling sales together with inadequate cash management can spell the end for a business. In such circumstances proprietors must take the time to carry out a thorough cash management analysis in order to tackle reduced spending, shortfalls and attempt to enhance income plus putting in place an improved cash management program.
Businesses can also encounter cash flow problems during times of economic growth, but there are actions that can be taken to reduce the influence of these difficulties and to ensure the company remains a viable proposition. Such actions could include:
*Generate a practical cash flow budget which sets out funding in the short term (say 30 – 60 days) and the long term (say 1 – 2 years).
*Take steps to ensure outstanding payments are received and speed up the collection of receivable accounts. Make sure your invoices have a due date on them. Contemplate offering a slight discount for punctual payment. Of major importance to make certain of good cash flow from clients is creating robust collection and invoicing systems.
*Carefully scrutinize all outgoings and rank them in order of importance. Hold accounts payable until the last day possible without incurring a penalty.
*Retain inventory items at the lowest possible practical level.
*Consider other sections where it may be possible to reduce operational costs, such as payroll, goods or services that return low profit margins.
Cash management is essential for any business; it gives you instant access to your financial records, saves time and money by eliminating the necessity to sift through receipts and paperwork. It puts you in control and will increase your profit margins.