Managing Cash Liquidity

Think fast: Name three things most important to the success of your business. If cash management didn’t make your list, you’re not alone. Most businesspeople think more about sales and marketing than the specifics of managing cash.

The term “cash management” is broadly enough defined so as to be perpetually misunderstood. People have a hard time describing it. But, simply put, cash management is about the connection of cash in, cash accumulated, and cash out.

Sounds simple enough. Yet many business owners and managers see their would-be-profitable companies teeter on the brink of loss because they don’t have a handle on what’s coming in and what’s going out. Maybe, since these things are basic, many assume they’re being done; but there are always surprises.

To help minimize unwanted surprises, particularly during tough times, here’s a checklist to keep you on track.

1. Know where you are and where you’re going.
Good cash management begins with a thorough assessment of your business’ current cash position and the development of a forecast based on that. This should tell you whether receivables are being collected quickly enough to pay vendors on time and whether you’re optimizing your float situation.

2. Analyze accounts receivable and payable.
If a cash position analysis turns up more cash out than cash in, the best place to start is receivables. I look at receivables first when a company asks for help with financial troubles. Usually, customers aren’t paying for reasons the business owner had no knowledge of. It leads to a discussion about product quality, service delivery, and other things not being done properly, which leads to excuses for non-payment.

A glance at receivables may also remind you that you’ve been shy about collecting. Many business owners show nine months worth of uncollected receivables. They are afraid to collect because clients might not pay or they may even lose customers. Collecting on time and sticking to credit policies are critical to keeping money flowing in.

An accounts-payable analysis will tell you whether you’re paying vendors too early to capitalize on float. Are you taking advantage of payment discounts? Are you paying too soon?

3. Use your bank’s tools.
With an array of cash management tools available, you never have to be in the dark again about your cash situation. The biggest mistake small-business owners make is using only a checking account to manage cash. Business owners, at minimum, should use an interest-bearing money market account to park excess cash. Limit the number of accounts at different banks. By consolidating accounts with one financial institution you can negotiate more favorable loan terms.

4. Seek financial advice.
The first step on the way out of denial is admitting that you’d much rather be out selling than crunching numbers—and then making sure you have the right person to do that for you. Most businesses have accountants, who tend to focus solely on tax minimization, or bookkeepers, who may not have adequate training to handle more sophisticated corporate finance.

Select a circle of advisers or “elders” whose main thrust is to assist and provide quality suggestions to budding entrepreneurs or managers.

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