In any business, as the saying goes, "cash is king," but it's especially true for small and mid-sized businesses where minor fluctuations in cash flow can have a tremendous impact - either positive or negative. Even so, many companies do not have a formalized cash management system. Many business owners tend to concentrate on earnings, rather than cash flow. Companies don't file bankruptcy because they incur an accounting loss; they bankrupt because they do not have the cash to pay their obligations.
Optimizing cash flow management is one of the most important tasks in achieving overall financial health. Efficient cash management goes beyond economic or financial planning. In order to convert your budgets and plans into cash forecast, you need a timeframe for transactions that generate income as well as those that relate to expenses.
An effectively administered and efficient cash management system will consist of:
Cash Flow Forecast - To effectively manage cash flow, you must be able to accurately forecast when you will receive cash and when cash must be paid out. The cash flow forecast covering a fiscal year should be based on the company's budget and adjusted for the timing of actual receipts and disbursements of cash for each line item of the budget. Using an accurate and detailed cash flow forecast, along with a detailed operating budget, enables businesses to evaluate future cash requirements, ensures that liabilities can be paid on time, and that capital can be secured to avoid a cash flow crisis. Optimally, businesses need to forecast daily, weekly, monthly, and annually, and compare the forecast against actual results and modify the budget and forecast when warranted.
Banking Relationships - The relationship between business owner and banker needs to be one of trust and partnership. The key is excellent communication. You need your banker on your side, and to make that happen, he needs to understand what you are doing and be confident in your expectations for the future. Your banker expects you to know much more about your business than he knows, and you need to keep him informed about your business and what you expect to happen in the future. The better you can project and forecast, the more confidence your banker will have in you, and the borrowing process will be smoother when the need arises.
Line of Credit Access - Shortfalls in cash can be devastating to businesses, and depending on the extent of the shortfall, recovering can be difficult. Establishing a line of credit as part of your contingency plan offers benefits. In some cases a line of credit is the best solution to maintain liquidity.
Investment Of Surplus Cash Program - Using your cash flow forecast and your detailed budget together ensures the availability of funds to pay liabilities and allows you to see the timing of surplus cash. Rather than allowing the bank to sweep the account, the surplus cash can be invested in higher yielding, safe investments. You can choose these investments based on the availability of the cash before it is needed to fund operations. Higher yielding investments will increase interest income and free cash flow, enhancing company profits and value.
Optimizing cash flow management is one of the most important tasks in achieving overall financial health. Efficient cash management goes beyond economic or financial planning. In order to convert your budgets and plans into cash forecast, you need a timeframe for transactions that generate income as well as those that relate to expenses.
An effectively administered and efficient cash management system will consist of:
Cash Flow Forecast - To effectively manage cash flow, you must be able to accurately forecast when you will receive cash and when cash must be paid out. The cash flow forecast covering a fiscal year should be based on the company's budget and adjusted for the timing of actual receipts and disbursements of cash for each line item of the budget. Using an accurate and detailed cash flow forecast, along with a detailed operating budget, enables businesses to evaluate future cash requirements, ensures that liabilities can be paid on time, and that capital can be secured to avoid a cash flow crisis. Optimally, businesses need to forecast daily, weekly, monthly, and annually, and compare the forecast against actual results and modify the budget and forecast when warranted.
Banking Relationships - The relationship between business owner and banker needs to be one of trust and partnership. The key is excellent communication. You need your banker on your side, and to make that happen, he needs to understand what you are doing and be confident in your expectations for the future. Your banker expects you to know much more about your business than he knows, and you need to keep him informed about your business and what you expect to happen in the future. The better you can project and forecast, the more confidence your banker will have in you, and the borrowing process will be smoother when the need arises.
Line of Credit Access - Shortfalls in cash can be devastating to businesses, and depending on the extent of the shortfall, recovering can be difficult. Establishing a line of credit as part of your contingency plan offers benefits. In some cases a line of credit is the best solution to maintain liquidity.
Investment Of Surplus Cash Program - Using your cash flow forecast and your detailed budget together ensures the availability of funds to pay liabilities and allows you to see the timing of surplus cash. Rather than allowing the bank to sweep the account, the surplus cash can be invested in higher yielding, safe investments. You can choose these investments based on the availability of the cash before it is needed to fund operations. Higher yielding investments will increase interest income and free cash flow, enhancing company profits and value.
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