Even though we are living in a credit centric time where cash management is becoming more of an after thought, the power of cash or being in a cash position is and will always be considerable for those that know how to properly manage cash.
When I’m talking about cash, it can be actual cash in the bank or a revolving line of credit that has funds available against the approved limit.
In either cash, we are talking about the lowest cost form of money you have at your disposal and how you should be managing it.
When I speak of getting the most out of cash, its based on having a good working understanding of what the cash flow will look like over a period of time as well as cost/benefit relationships between receiving cash and making cash payments.
Everything thing in any business can be boiled down to two things … time and money. Everything you earn and spend will result in a cash transaction at some point in time. Everything you acquire or need to repay will have a specific payments required at a closing rate or scheduled payment date.
By understanding the expected inflows and outflows of your business in sufficient detail, you can determine how to best utilize cash to get more than face value.
For instance, paying suppliers within a discount period may provide a greater return on cash than buying an asset for cash that could have been partially or completely financed.
Collecting money sooner than later provides more cash in hand to apply in the business, but what types of cash or non cash incentives have to be provided to do so?
The first step in any form of serious and worthwhile cash flow management is to complete a cash flow forecast.
I recommend that any business forecast the future inflows and outflows of their business for at least 90 days, and turn it into a rolling forecast by updating it at least once a week, adding an additional week into the future and carrying forward and/or adjusting inflows and outflows that have not been resolved on schedule. Also, cash forecasting should be done in weekly time segments as monthly segments are too long an interval to match up inflows and outflows.
By going through this exercise at least once a week, you have a much better perspective of the cash that’s going to be available at any point in time as well as when cash may be short or in jeopardy of being short.
This can be extremely useful in situations of business distress and business growth.
In situations of distress, its going to be important to understand exactly when all commitments are going to be coming due, which ones can wait, which ones will require some servicing, and so on. Its going to be important to make sure that funds are available every pay period to pay salaries, otherwise everything will quickly grind to a halt.
In situations of growth, more capital may be required to fuel growth in the form of more inventory, more equipment, more working capital, more accounts receivable.
Properly utilizing cash to keep the balance sheet in order and leveraging cash to its fullest to secure cheaper forms of business financing can be instrumental in funding growth.
But getting greater mileage out of cash starts with weekly cash flow forecasting, months into the future.
The sooner you start to incorporate this type of discipline to your weekly routine, the sooner you will start seeing the benefits.
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