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Cash Management

Cash is the lifeblood of your business. Effective cash management ensures you can meet obligations, seize opportunities, and maintain financial health.

Why Cash Management Matters​

Even profitable businesses can fail due to poor cash management. You need to:

  • Pay bills on time
  • Meet payroll
  • Purchase inventory
  • Handle emergencies
  • Invest in growth

Cash Flow vs. Profit​

Profit = Revenue - Expenses (on paper) Cash Flow = Actual money in - Actual money out

Critical Difference

You can be profitable but cash-poor! Sales on credit count as revenue but don't provide immediate cash.

Daily Cash Management Tasks​

1. Monitor Bank Balances​

  • Check all accounts daily
  • Note pending transactions
  • Watch for minimum balance requirements
  • Track upcoming payments

2. Record Cash Receipts​

  • Log all deposits immediately
  • Record check and credit card receipts
  • Note cash sales
  • Match to invoices

3. Process Payments​

  • Pay bills by due date
  • Take advantage of early payment discounts
  • Record all disbursements
  • Retain payment confirmations

4. Petty Cash​

  • Maintain small cash fund for minor expenses
  • Keep petty cash log
  • Require receipts for all disbursements
  • Reconcile regularly

Cash Reconciliation​

Bank Reconciliation (Monthly Minimum)​

Compare your books to bank statements:

Bank Statement Balance $10,500 Less: Outstanding Checks ($1,200) Plus: Deposits in Transit $2,000 Adjusted Bank Balance $11,300

Book Balance $11,450 Less: Bank Fees ($50) Less: NSF Check ($100) Adjusted Book Balance $11,300

The adjusted balances should match!

Benefits of Regular Reconciliation​

  • Catch bank errors
  • Identify fraudulent transactions
  • Find recording mistakes
  • Ensure accurate cash balance
  • Detect missing transactions

Cash Flow Forecasting​

Weekly Cash Flow Projection​

ItemMonTueWedThuFriTotal
Starting Balance$5,000$4,500$6,200$5,800$4,900
Cash In
Customer payments$2,000$3,000$1,500$2,500$3,000$12,000
Other income$0$0$0$0$500$500
Cash Out
Supplier payments($1,500)($500)($1,000)($2,000)($1,500)($6,500)
Payroll$0$0$0($1,400)$0($1,400)
Other expenses($1,000)($800)($900)$0($500)($3,200)
Ending Balance$4,500$6,200$5,800$4,900$6,400$6,400

Benefits​

  • Anticipate shortfalls
  • Plan for large payments
  • Avoid overdraft fees
  • Optimize timing of transactions

Improving Cash Flow​

Accelerate Cash Inflows​

1. Invoice Promptly

  • Send invoices immediately after delivery
  • Use electronic invoicing
  • Include all necessary details

2. Offer Payment Incentives

  • Early payment discounts (e.g., 2% if paid within 10 days)
  • Multiple payment methods
  • Automatic payment options

3. Tighten Credit Terms

  • Require deposits for large orders
  • Shorten payment terms (Net 30 → Net 15)
  • Credit checks for new customers
  • Progress billing for long projects

4. Follow Up on Overdue Accounts

  • Send reminders before due date
  • Contact immediately after due date
  • Establish collection procedures
  • Consider factoring for problem accounts

Delay Cash Outflows (Without Damaging Relationships)​

1. Negotiate Payment Terms

  • Request longer payment terms (30 vs. 15 days)
  • Ask for progress billing on large purchases
  • Arrange payment plans for big expenses

2. Strategic Payment Timing

  • Pay on due date (not early unless discount offered)
  • Use credit cards wisely (extends payment 30 days)
  • Schedule large payments around cash inflows

3. Control Inventory

  • Don't overstock
  • Just-in-time ordering where possible
  • Return slow-moving items

4. Optimize Expenses

  • Review and eliminate unnecessary subscriptions
  • Negotiate better rates with vendors
  • Consider leasing vs. buying equipment

Cash Reserve​

Emergency Fund​

Maintain reserve equal to 3-6 months of operating expenses.

Benefits:

  • Handle unexpected expenses
  • Cover slow periods
  • Provide peace of mind
  • Avoid expensive emergency borrowing

Where to Keep Reserves​

  • High-yield savings account
  • Money market account
  • Short-term CDs (ladder maturities)
  • Mix for balance of access and return

Credit Management​

When to Use Credit​

  • Bridge timing gaps
  • Finance growth opportunities
  • Purchase assets
  • Smooth seasonal variations

Credit Options​

  • Business credit cards
  • Line of credit
  • Term loans
  • Equipment financing
  • Invoice factoring

Credit Tips​

  • Maintain good credit score
  • Don't max out credit lines
  • Pay more than minimum
  • Use for strategic purposes
  • Have backup financing in place

Cash Management Tools​

Accounting Software​

  • Real-time cash balances
  • Automated reconciliation
  • Cash flow reports
  • Payment reminders

Separate Accounts​

  • Operating account (daily transactions)
  • Savings account (reserves)
  • Payroll account (if needed)
  • Tax account (set aside tax money)

Payment Systems​

  • ACH for recurring payments
  • Wire for urgent large payments
  • Credit cards for expense management
  • Mobile payment apps for flexibility

Red Flags​

Watch for these warning signs:

  • ⚠️ Consistently low cash balances
  • ⚠️ Using credit for operating expenses
  • ⚠️ Late payment fees
  • ⚠️ Bounced checks
  • ⚠️ Borrowing to make payroll
  • ⚠️ Inability to take advantage of vendor discounts
  • ⚠️ Increasing accounts payable aging

Next Steps​

Learn about managing accounts receivable to optimize customer payments and improve cash flow.