Cash is the fundamental ingredient to every business.  Cash shortages can threaten a businesses very existence.  At the very least, poor cash flow management can mean missed business opportunities.  The effects of too little cash are obvious but business owners should also be mindful of situations when the company consistently holds excess cash.  Non-productive use of excess capital can eventually doom a firm. Furthermore,  unpredictable cash flows can be as harmful as no cash at all.  The idea behind cash flow management is to maintain optimal levels of cash at the minimal cost.
 

OBJECTIVES

Most of cash management involves trying to forecast inflows and outflows that are somewhat inconsistent and where the timing and amounts are relatively uncertain.
Once these cash flows are forecasted, the business owner should then try to minimize the effects of any mismatch between cash inflows and cash outflows.  If the business has a cash surplus, the excess cash should be invested in liquid investments to offset any interest expense that may be incurred to finance short term cash shortages.  The basic objective of the business owner with regards to cash management should be to accelerate inflows while delaying outflows for as long as possible.
 

INFLOWS

Most businesses grant some kind of credit.  This is done mostly for marketing reasons.  Managing these receivables is essential to good cash flow management.  Policies should put in place to minimize the cost and risk of holding receivables.  These policies should also help make the timing of collections as predictable as possible.  The idea here is to try to speed up the billing and collections cycle as much as possible.

OUTFLOWS

All businesses use some sort of supplier supplied financing for purchases.  These accounts payables can help smooth cash deficiencies.  Policies should be put in place to take full advantage of payables.  Using a combination of trade discounts, payment negotiations for extended terms, and timing payables for the latest possible dates should be used.  Controlling inventories is another key in this area.  Excess inventory ties up cash.  Fast inventory turnaround should be on the mind of every business owner.
 
 
 
 
 
 
 

WEBLINKS

http://www.smartbix.com

This web site has a wealth of links concerning cash management.  It references many different articles, reports, and checklists.

http://www.inc.com

This is the web site maintained by the magazine Inc.  It not only has many links to articles about cash flow management, it has a wealth of information about business in general.

http://www.ioma.com

This web site is the home to the Cash Flow Enhancement Report.  The report is a subscription service but the web site does contain many articles on the subject of cash flow management.

http://www.access.digex.net/~evans/cashflow.html

This is a helpful checklist entitled “Ten ways to improve your business cash flow”.