Cash management tips

The role of cash management is often under emphasised in the world of business and finance. Since controlling money is one of the most important functions a business must undertake, accurate and effective cash management is vital to ensure the business survives in the long term. money is the life blood of a business and without it the business will almost certainly fail.

The main objective of cash management is to ensure there is always a positive cash flow, i.e. more money coming in to the business than going out. This cash management objective is fine in theory, but in the real world cash management is not that easy. In the real world there are often deviations from the cash management plan and there will be times of both positive and negative cash flow.

Effective cash management relies on identifying and predicting the periods of negative cash flow using one of the many cash management tools available. The most well known and popular cash management tools used to identify the periods of negative cash flow is the cash flow forecast. Identifying the periods of negative cash flow is only half the story and the real challenge is to stop the business from getting in to a negative cash flow position in the first instance. If this is not possible effective cash management involves ensuring the periods of negative cash flow are kept to an absolute minimum and that there are measures in place to keep the costs associated with negative cash flow, such as interest and charges amongst many other things, as low as possible.

Effective cash management relies on close monitoring and scrutiny of the debtor accounts on a daily basis. The debtors provide a cash inflow and the business must collect this money as quickly as possible. Getting the money in quickly not only means the business has funds available for the day to day running of the business but also minimises the costs associated with advancing credit to customers. Monitoring and controlling the debtor accounts is a full time task that will be the responsibility of the sales ledger department, the size of which will depend on the number, size and complexity of customers.

Many businesses will have a debt collection policy, such as 30 day terms, but this is unlikely to apply to all customers. If the business depends on a handful of large customers the collection may be longer than 30 days as the large customers exert their power and can dictate to the business when they will pay the outstanding amounts due and not the other way around. To avoid this scenario the business must not become over reliant on any customer.

Cash - The life blood of all businesses, regardless of their type or size. Effective cash management will ensure long term business survival.

English cash - Notes and coinsCredit: yackers1

Effective cash management relies on close monitoring and control of the accounts payable and trade creditors, which is the responsibility of the purchase ledger department. Effective cash management in the purchase ledger function involves delaying the payment if creditors for as long as possible. Keeping the cash in the business bank account is good cash management in the short term, although it may not necessarily be good in the long term. At first glance with holding supplier payments may seem like an easy task however in reality this is not the case. Credit terms should be stretched as far as possible without adversely affecting the trading relationship with the business suppliers. If a trading relationship breaks down the supplier may refuse to provide things to the business. This will not be a problem if there are alternative suppliers but if a specific item is only available from a sole distributor you will need to keep a good trading relationship to ensure continuous supply. To reduce the impact of any problems it is important the business does not become too reliant on any single supplier.

Effective cash management relies on close scrutiny and control over the business bank account. It is important to regularly check the funds available and ensure there is cash in the bank to drawdown, or take the necessary steps required to get the cash in to the business bank account. Internet banking has had a major impact on cash management and made effective cash management much easier. Internet banking allows you to see the cash available and the bank transactions on a real time basis. It is possible to monitor cash receipts to ensure that customers are paying their debts, hence making sales ledger control much easier. It is possible to monitor cash payments to ensure there is the cash available to pay suppliers as they stand to demand payment, or take the appropriate action.

Effective cash management involves coordinating the activities of the sales ledger department, the purchase ledger department and the bank control department. If one department is underperforming or failing in its duties the whole cash management function will be compromised. Effective cash management is not easy and something that should be controlled and overseen by senior management and not delegated to junior members of staff or those without the relevant skills or experience.