Cash management is the process of effectively tracking, controlling, and optimizing the inflow and outflow of cash in a business or individual’s finances.
Primary Implication
Knowing how business cash flow is calculated is the start of managing cash. Those who don’t practice cash management will eventually fall into ” borrowing from Peter to pay Paul” when cash gets tight. The longer it takes them to pay Peter back, the higher their risk of going out of business.
Stop the madness of paying past due obligations with money that should go to cover current obligations. Anytime you pay old bills with money obligated to bills coming in, you have a cash management breakdown. This is a shell game that gives you the false sense that your cash inflows are greater than your cash outflows.
The reality is every time you use new cash inflows to pay past due cash outflows, you dig yourself deeper and deeper into a cash flow problem that will bury you.
Overview
Cash Management represents the proactive control over cash receipts dispersed through disciplined control over cash outflows based on accurate cash inflow projections.
The purpose of a structured Cash Management System is to identify and project all cash movement in and out of the company by week, every two weeks, over a four, eight, twelve, or fifty-two-week period. Below are four fundamental management principles that will lead to better small business cash flow management:
- Business control begins with proactively managing cash flows.
- Daily cash flow projections rob you of time to improve the quality of your cash flow.
- Being more interested in your topline often leads to loss of sight to your bottom-line.
- Projecting your weekly ending cash position is like monitoring your blood pressure.
The law of Cash Management is that Cash Inflow must be higher than Cash Ooutflow. If you find yourself with little to no gap between your cash outflows and your inflows, that’s the equivalent of your doctor telling you that your blood pressure is too high. Left uncontrolled, high blood pressure damages arteries that can become blocked and prevent blood flow to the heart muscle, leading to a possible heart attack.
Disciplined Cash Management is how you recognize and stop unnecessary cash outflows currently depleting your cash reserves. Many have found that doing these projections every Monday helps them prioritize where they need to exert more effort each week. The goal is to ensure your projected cash outflows never exceed your available cash.
To prevent Cash Outflows from exceeding Cash Inflows, maintain a four-week rolling cash forecast to confirm how much money you are holding onto from operations. Failure to do this means you fail your business by not projecting your cash flow for the weeks ahead.
