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How To Use Cash Management in Your Business
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The How-To Business Book
11/20/2000
By: Susan E. Cornell
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Your business is profitable and growing - but sometimes cash runs short. As a result, bills may be paid late or by adding to credit-card debt. This is a classic, common cash flow problem.
Analysts say the major reason for business failure is, in general, poor management. Often it is poor cash management.
Cash is real, readily available money. It is neither property nor accounts receivable nor inventory. Cash flow comes in two flavors: positive and negative. Components of a cash-flow statement include operating cash flow, investing cash flow, and financing cash flow. By understanding these three terms you are in a better position to focus on the uses and sources of cash,
• Operating cash flow, or working capital, is cash from sales.
• Investing cash flow refers to cash generated from non-operating activities such as investments in equipment or nonrecurring gains and losses.
• Financing cash flow is generated from external sources, such as shareholders or lenders.
The Reader's Digest version of cash-flow management is this: Cash inflows (sales) and cash outflows (paying expenses) usually occur at different times. Often, cash outflows precede inflows, leaving your business short of money. This is your cash flow gap. The gap may not be covered by a cash inflow for days, weeks, months or longer. But, with proper management you can narrow or close the gap.
To examine what affects the flow, look at your own cash-flow situation. If you can answer these four questions, you are managing your cash flow and probably managing your business efficiently and effectively: 1) How much cash is needed to operate, and when is the cash needed? 2) How much cash is on hand? 3) How do both expenses and income impact expansion needs? 4) Where does the business spend its cash, and where does its cash come from?
The principles of good cash-flow management are pretty simple:
• Understand how, when and where cash needs occur;
• Know your prime sources for additional cash needs; and
• Maintain relationships with those who can help you meet future needs when they occur. These parties may include bankers and other creditors.
There are plenty of cash-management products and services out there. And with advances in technology, the list of potential account features grows apace.
This is where the cash manager plays a key role. It is the cash manager's responsibility to collect from customers, invest funds at the highest rates available (accounting for risk and maturity), borrow and disburse funds, concentrate funds from outlying banks, and manage relationships with banks.
Here are some features may by offered by a full-service cash-management department to help businesses manage banking right over the Web:
• Account reconciliation - A company can send the bank an electronic file listing checks written. The bank then balances the statement and sends a report listing outstanding and cleared checks.
• Zero balance accounting (ZBA) - This can eliminate unnecessary transfers between accounts as, at day's end, an automatic transfer from a master account is made to cover the checks written against the ZBA.
• Balance reporting - A company can perform transfers, obtain balances, determine checks cleared, and request stop payments 24/7 online.
• Check safekeeping - Company checks can be retained by the bank rather than being returned with the monthly statement.
• Controlled disbursement - This service calculates the dollar amount of checks to clear on a given day. This can help you make investment or borrowing decisions.
• Direct deposit - The company's mainframe can be linked directly to the bank or software provided so that direct deposit can be offered to employees.
• Electronic depository transfer checks (EDTC) - Via a PC or toll-free call, funds can be transferred overnight from a deposit account at another bank to the bank managing your cash.
• Loan management - The company's account can be monitored and automatic advances made against a line of credit to fund the company's account.
• Lockbox services - To minimize collection float, customers can bypass the company and pay the bank directly. This means the company need no longer process payments or go to the bank to make deposits.
• Positive pay - This service fights check fraud as the bank matches each check written through an account. The company is alerted to discrepancies and can decide to reject or process the check.
• Preauthorized electronic debits - Automatic payments can be collected from consumers by the company or by the bank on its behalf.
• Overnight investment service - Excess operating cash can be automatically invested daily. A bank may invest hundreds of millions of dollars daily for its commercial clients.
• Subaccounting - A company with multiple units may use a single account with an additional code in the check number to identify individual units.
• Vendor payments - Can be made online rather than by snail mail.
• Wire transfers and online business - A Web-based banking system can process repetitive and non-repetitive wire transfers.
A cash-management department's ability to assist you in planning, organizing and controlling the flow of funds can help you guide your company and its future. It can also help you to streamline difficult office tasks and increase your efficiency.
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