Cash Management – the lifeblood of your business

Cash – Vital for your business
Cash flow is the life blood of all businesses and is the primary indicator of business health. It is generally acknowledged as the single most pressing concern of most small and medium-sized enterprises (SMEs), although even finance directors of the largest organisations emphasise the importance of cash, and cash flow modelling is a fundamental part of any private equity buy-out.

Look after it and it will look after you
In a credit crunch environment, where access to liquidity is restricted, cash management becomes critical to survival. In its simplest form, cash flow is the movement of money in and out of your business. It is not profit and loss, although trading clearly has an effect on cash flow. The effect of cash flow is real, immediate and, if mismanaged, totally unforgiving. Cash needs to be monitored, protected, controlled and put to work.

Four principles of cash management

  1. Cash is not given. It is not the passive, inevitable outcome of your business endeavours. It does not arrive in your bank account willingly. Rather it has to be tracked, chased and captured. You need to control the process and there is always scope for improvement.
  2. Cash management is as much an integral part of your business cycle as, for example, making and shipping widgets or preparing and providing detailed consultancy services.
  3. Good cash flow management requires information. For example, you need immediate access to data on:
    1. your customers’ creditworthiness
    2. your customers’ current track record on payments
    3. outstanding receipts
    4. your suppliers’ payment terms
    5. short-term cash demands
    6. short-term surpluses
    7. investment options
    8. current debt capacity and maturity of facilities
    9. longer-term projections.
  4. You must be masterful. Managing cash flow is a skill and only a firm grip on the cash conversion process will yield results.

Make a competitive difference

Professional cash management in business is not, unfortunately, always the norm. For example, a survey conducted by the Better Practice Payment Group in 2006 highlighted that one in three companies do not confirm their credit terms in writing with customers. And many finance functions do not maintain an accurate cash flow forecast.

Good cash management has a double benefit: it can help you to avoid the debilitating downside of cash crises; and it can grant you a commercial edge in all your transactions. For example, companies able to aggressively manage their inventory may require less working capital and be able to extend more competitive credit terms than their rivals.