Why cash management makes cents

An introduction to cash flow strategies for small business owners


Let’s start with ‘What is cash?’ Cash is, typically, your bank account, but in the broadest sense, it encompasses anything that is liquid, which you can convert to cash in the next day. In some cases, even stocks and bonds are cashable.

Cash management is the process of collecting, disbursing and investing your cash flows within your organization, while maintaining your company's liquidity. It’s a broad area that must be wisely managed in order to meet current and future payment obligations, and maintain business stability.

Cash management can be a pain point for small businesses. While large firms have loan structures and credit lending in place, small businesses often lack that advantage. They are too small to have a large line of credit or loan structure. They may have a large revenue stream, but that doesn’t necessarily translate into cash flow.

For small business owners and managers, it’s essential to understand how cash flow is impacted by profitability, and what you can do to protect yourself.

The difference between net income and cash flow

Net income is the profit or loss that your business has after subtracting all expenses from your total revenue. Net income has a direct impact on cash flow, however, that impact may not be immediate.

Cash flow is the multitude of cash inflows and outflows over a period, from changes in ‘working capital’. It is cash flow, not profits, that is the lifeblood of your business. Crucial to controlling your cash flow is having a detailed cash-flow projection, updated at least every month. It’s not a question of adding up the numbers. It’s about managing the numbers. Often by careful cash-flow management, you can realize huge cash savings without changing the course of the business.

To properly manage your business's cash flow, you must first take stock of the components that affect the timing of your cash inflows and cash outflows. A good analysis of these components will point out problem areas that lead to cash flow gaps. You can then address how to close those gaps. Here are some important components to examine:

Sales cycle

There are various aspects of the sales cycle that impact incoming cash flow, including the order volume and rate, delivery timing and service, customer invoicing timing and the line items included, and the collections timing and process.

An important part of the collections process is Accounts Receivable, which are sales that have not yet been collected in the form of cash. An Account Receivable is created when you sell something to a customer in return for his or her promise to pay at a later date. To properly manage your cash flow, you must know the negative cash flow effects caused by the time it takes that customer to pay on their account.

You can set time limits, called Credit Terms, for your customer’s promise to pay for the merchandise or services purchased from your business. Credit Terms affect the timing of your cash inflows. Offering trade discounts as part of your Credit Terms is one way to encourage prompt payment. You can also establish a Credit Policy, a blueprint to use when deciding to extend credit to a customer.  

Purchasing cycle

Cash flow related to the purchasing cycle encompasses:

  • The timing of your order for your vendors’ products and/or services
  • The payment made for what you purchased – the timing and quantity
  • What line items you have been invoiced for, and the pricing. They should match your expectations. Taking delivery of a product or service without making immediate payment results in an Accounts Payable.

Setting up an Accounts Payable schedule is crucial for optimum cash flow management. It covers the amounts you owe to your suppliers that typically are payable over a period of 30 to 90 days, but depends on the industry in which you do business. Paying for all goods and services at the time you purchase them can negatively affect cash flow.

Inventory cycle

Inventory refers to the merchandise or supplies your business keeps on hand to meet the demands of customers. The timing of when you purchase inventory, and when you collect on sales of your inventory is crucial to managing cash flow.

An excessive amount of inventory hurts your cash flow by using up money that could be used for other cash outflows. If you’re running into cash shortfalls, one of the first candidates for cutting is inventory purchases where there is a minimal risk of stock shortages.

Managing your sales, purchasing and inventory cycles is key to creating an accurate cash flow projection.

Share your processes

To ensure that you are paid in time, keep your customers in the loop. In addition to printing your expected payment date on the invoice, establish a system for setting up calls and/or printed reminders. Train your customers as to your expectations. Establish a time frame that works for you. The same principle applies to paying your vendors and suppliers.

These steps are fundamental to building solid relationships. Having a solid cash flow management system in place ensures that you will be paid on time, and that your vendors and suppliers will be paid on time. It puts you in control.

It’s important to make sure your business has their cash management processes in place before there are any cash flow issues. A management consulting professional can support you when creating cash flow projections as well as advising on how to implement better strategies.


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