Cash Management – The Nickels and Dimes Add Up

I have been advised that one of the most critical skills I need to develop as a business owner is that of "cash management". While I think I have some understanding of what this means, I am not absolutely sure. Just what is involved in good "cash management"?
 A. Cash is the engine that runs every business. The successful business owner should view the assets on the Balance Sheet as potential sources of cash: remembering that some accounts are a near term source, others may be longer term sources. 
     Great care must be taken to ensure that all cash receipts are properly accounted for and deposited in the bank. No cash should be held out to handle small expense items. This procedure opens the door to possible misuse of cash. Small cash disbursements may be handled through a "petty cash" account controlled by you or a trusted employee. At the same time, controls must be placed on all disbursements to be sure they are properly documented by vendors invoices, receiving reports, etc. Also, disbursements should be scheduled within the same time frame as budgeted in the cash flow projections, if possible. An unexpected cash shortfall may be caused by payments being processed earlier than planned.
     A reconciliation of the cash balance shown on the monthly statement received from the bank and the cash account on the books of your business must be made monthly, preferably by you, the business owner. All necessary corrections must be made on a timely basis so that errors do not lead to larger problems with your bank in the days or weeks ahead.
     If sales are made to customers on a credit basis, great care must be taken to be sure accounts are collected on time. Each credit customer must have a special ledger card showing the invoices charged to the account, cash received and the balance still owing. All the various ledger cards combined are referred to as the accounts receivable ledger. The sum of all the accounts in the accounts receivable ledger must agree with the account entitled Accounts Receivable in the Current Asset section of the Balance Sheet. If a customer is a slow payer, a different credit arrangement should be made with him. Some businesses offer cash discounts to customers who pay their accounts within 10 days or some other specified period of time. You must take the responsibility for contacting past due customers so that firm payment commitments are received without alienating the customer.
     Inventory levels on the Balance Sheet should be of great concern to you. In most cases cash is used to purchase inventory to be sold to customers in a relatively short period of time. The annual expense of holding inventory can run as high as 30 cents of each dollar of inventory cost when the expense of interest, property taxes, insurance, obsolescence and mysterious disappearance are considered. Special inventory ledger sheets should be maintained for each item in inventory to track movement in and out of the shop. The statistics developed from each ledger card will help you reorder inventory on the most economical basis. The various inventory ledger cards are kept in a book called the inventory control ledger. The sum of all the ledger cards in the inventory control ledger must agree with the Inventory account in the Current Asset section of the Balance Sheet. Cash should not be tied up in inventories for a long period of time. In an effort to conserve cash you may consider asking suppliers to provide extended payment terms on purchases.
     It is very important to practice cash planning or forecasting on a continuing basis. You should regularly prepare budgeted Income Statements and accompanying Balance Sheets. With these two statements as a source of information, you can then prepare cash flow budgets by month for at least the year ahead. The cash flow budget will demonstrate to you whether you have the cash resources to fund the business as planned. If projected cash balances are not adequate, you might consider approaching your banker or financial backer to ask for additional short term credit or a delay in making scheduled loan repayments. You may also look at any scheduled purchases of assets and equipment that are in your forecast to determine if they can be delayed until cash balances are healthier. The point of the budget or forecasting process is to provide you with sufficient data far enough in advance for corrective action to be put in place.

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