We’re anxious about cash management. There is not enough money going into the savings account for the company overall. I need more money. The bank account is low. I have backed myself in the corner by not paying attention to the books and recognizing that things would be tight this month.
Thoughts of the Day: Cash management and cash on hand are crucial for any business. There is a way to get the bank account built up to a level that’s healthy. Figuring out what each month’s cash demands will help you to plan out needs. Look for help from government programs to spread out the risk. Learn to live within your means by prioritizing what you want for an outcome.
Importance of cash management in business
Without cash on hand, too much time goes into juggling, not enough into planning. How much extra time would you have if you didn’t have to manage cash so closely? A good rule of thumb is to have between 3 and 6 months of operating expenses in cash in the bank. The more cash your company has, the more likely you can weather ups and downs. Including customers delaying payment, vendor requests for pre-payment, and investments to grow the business.
Cash management is a process to build up cash on hand. It doesn’t happen overnight. Start by figuring out a goal and a timeframe – get 1 month of cash on hand within a year, for example.
Figure out how much money would need to be set aside each week in order to accomplish that goal. Compare the savings goal to the net income you expect the company to yield this year. Subtract any money you’ll have to pay for taxes and principal payments. What’s the outcome – positive or negative?
Overseeing inflow and outflow
Cash management activities are aimed at efficiently handling the inflow and outflow of cash. If the outcome is positive, your projections show that there will be enough profit this year to put away 1 month of cash. Great! Think about increasing the cash on hand goal.
A negative number means there’s probably not enough profit to support the goal. Fix it now while it’s only a plan, while there’s still time! Review this year’s plan and consider boosting revenue or cutting expenses to close the gap. Find a way to build up some cash on hand, no matter what.
Consider doing a weekly, monthly, quarterly, and annual projection, so you can see the cash outcomes at various points throughout the year. Adjust the amount you plan to put away weekly so that the calculation of profit – principal payments – taxes – amount to put towards cash on hand is zero or positive.
Once you decide on an amount to put into savings each week, set up a separate holding account in which to deposit those savings. Lock that account and throw away the key. Try not to use that cash on hand for anything, no matter how tempting.
Strategies for managing resources
Other than boosting revenue or cutting expenses, there is only one additional way to boost cash on hand. That’s by taking on debt. Seem counterintuitive to take on debt to boost cash? Not necessarily. Cash in king, and debt needs to be paid down slowly over time. Make sure that you can show a way to get over the hump, leading to sufficient profits to afford the debt service.
If your company has a history of growing retained earnings/equity, your company may be eligible for a loan. There are a number of state and federal programs out there designed to help a company get through growth spurts and investments in infrastructure. Check out the state site for business development centers, and federally go to the SBA for information on programs that might be available. Many programs are in conjunction with your local bank, so be sure to talk to your local banker as well.
While it’s always preferable to not need debt to get through, it’s the smart business owner who applies for backing before the company needs it. Building up cash on hand as priority number one will help reduce the time, energy, and stress-related to cash flow management, so long as doing so leads to a better long-term net income picture.
Looking for a good book? Debt Free: 9 Step System to Get Out of Debt FAST, by Ashton Pereira.
