3 Keys to Cash Management

July 14, 2021

Cash Flow Management is crucial to the success of a business and yet, it is most often overlooked by the small business owner. Failure to manage cash flow can lead a company into compromising situations, unable to take advantage of growing demand, meet payroll, or survive seasonal cycles.

Cash flow management is knowing the pattern of cash in and cash out of your business, anticipating cash shortages, and creating your rainy day fund. Simplified, the keys to getting started managing your cash flow can be broken down into 3 steps:

  1. Managing Receivables
  2. Managing Payables and Inventories
  3. Cash Budgeting

The first step is to look at your credit, billing, and collection procedures. Are these procedures effective and efficient? Do you conduct credit evaluations before extending payment terms? Are your payment terms realistic compared to industry norms? Are you billing promptly and accurately? Do you call on past due accounts? Do you send client statements? Are you waiting 3 days for a check to clear before the funds are available? The goal is to maximize cash into the business cost effectively. Many businesses outsource receivable management in order to keep operating costs low and take advantage of low cost credit evaluations, as well as a professional collections team.

With receivable management in line and cash coming in steadily, the next step is to hold onto it as long as possible, while keeping suppliers and payables current. Understanding and managing the pattern of payments will allow you to make wise decisions on the use of funds. You may find that you can keep payments current by sending payment mid-month and ultimately be able to take advantage of a supplier discount at the beginning of the month. Managing inventories and supplier relations can be very challenging. Excess inventory means excess expenses. Consider comparing your inventory turnover rate with that of the industry. A high turnover rate could indicate slow sales, while a low rate could indicate overstocking (and excess costs).

The final piece to the puzzle is cash budgeting. Once you have your procedures operating at optimal efficiency for bringing cash in and managing cash out, consider studying historical patterns, tracking industry standards, and forecasting for the future.

Renee Tyack
Vice President of Sales
Capital Plus, a division of United Capital Funding Group, LLC.
Office: 614-848-7620