Business Cash Management Essentials

Many aspiring entrepreneurs go into business simply because they have a product or a service these people feel strongly they can offer that will in some way be better than what is now available to their potential customers. Either they will have more reasonable pricing, personalized customer service, a greater quality product, more convenient hours, highly effective marketing or some other “edge” on the competition. And in many cases, the entrepreneurs are usually correct and their fledgling business grows as sales increase. This would seem to be great news and promise success to the small business, but unfortunately there is more to staying in business than providing a quality product or service. Cash management is the absolute key to the short and long-term success of any business venture, be it an one-man operation or an international corporation employing hundreds.

The trap entrepreneurs often fall under is thinking that expertise in their selected field and a decent sales quantity are enough, and that cash flow will be there as long as they are busy. Most of failed businesses can point to mismanaged finances as the primary reason for their particular demise, even in cases where sales are booming. So why is it that the business making sales and keeping busy is at risk of failure, and what can a business owner do to minimize their risk even when finances and accounting are not their stand out point?

First, let’s understand the basic issue. Sales are absolutely essential to keeping a successful business. But why usually are they “enough”? There are several factors that will weigh in:

Inventory – rate of interest cap require large outlays of money to purchase inventory, which may or may not be sold quickly, tying up huge quantities of cash that lay on the shelf or warehouse ground and gather dust.

Receivables & Payables – if credit clients take longer to pay than the business takes to pay its outstanding bills, a cash shortage could become a real problem; a balance between receivables and payables scheduling is essential to appropriate cash management.

Capital Expenditures : large outlays of cash intended for assets such as equipment, vehicles, real estate property or technology can be important for company growth, but pose an income problem if they are not managed correctly.

Pricing – goods and services need to be priced so that not only the cost of the purchase is considered, but the business overhead can also be taken care of and a profit margin is roofed. No business can be maintained by losing even small amounts of money upon every sale; a business that has to cut prices that far is doomed to failure.

Sales Cycles — some businesses are cyclical or in season, or they ebb and flow based upon factors outside their direct control. Assuming the sales and receivables will always “be there” during the lean occasions is a huge mistake that can have serious consequences; business owners need to maintain the cash buffer to see them via lean times; whether those downturns are planned or unexpected.
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So, just how can a business owner minimize their own exposure to cash shortages? Following are some general guidelines for keeping track of your money and protecting your business.

Plan your cash flow at least 6 months in advance to ensure you have the cash to meet your business requirements, including payroll, estimated tax payments and general operating expenses.

Use your bank balance as a tool within planning, but don’t mistakenly think of it as actual, usable cash. “I should have money, I haven’t run out associated with checks yet” isn’t a good strategy for cash management. Always remember that your financial institution balance fluctuates dramatically as bills are paid, assets are purchased plus invoices are collected.

Think about your company and try to establish a few signals from the ebb and flow of sales. Depending upon exactly what business you are in, it could be the dimensions of your phone bill that allows you to gauge how sales are going, or even it could be the number of packages out the doorway each day, or the mileage driven by your delivery trucks. Obviously this is various for each individual business but knowing what the signals are without having to evaluate a monthly or quarterly monetary statement every day could be a good tool for being proactive and avoiding cash crunches instead of having to react to turmoil situations.
Your banker may be able to provide assistance in the form of tools you can use to keep on top of your cash management situation. Some cash flow management products and services offered by numerous banks that can be helpful include:

Attract accounts -these can be used to provide overdraft protection and can be set-up in order to leave only enough cash in your checking account to handle the needed outlays for the day; your remaining balance can be moved into investment accounts so the money remaining in your account is making money for you.

Credit lines can be used in cases where you need a quick cash outlay but know you will have the cash to cover the expenses shortly. Banks appreciate advance planning, and will be more likely to set up a credit line for your business or offer a loan if you have a clear plan for where the cash is going and how it will be recouped.

Digital payment tools such as ACH direct debits, wire transfers and remote deposit capture help you ensure that obligations from your customers are in your account as quickly as possible, while you can better manage plus schedule payments to your suppliers.


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