The days of seemingly endless venture capital and easy credit are long over. In the current economic environment, business owners and finance executives are realizing more clearly than ever how critical it is to pay attention to the quintessential element of business: cash.
The unfortunate reality is that businesses fail. These failures can be for any number of reasons but the most common is poor cash management even when everything else is being done right. This is because so many business executives and owners place their entire focus on revenues and profit and fail to make cash management a business priority. No one will argue that revenue and profit are the ultimate goal of any business. They have little value, though, if the business cannot meet its payroll or trade obligations. Chapter 11 courtrooms are littered with profitable companies.
While the basic principles of cash management are relatively simple, the actual process of monitoring, managing and forecasting cash can be convoluted. For small businesses, the data is generally within the purview of the owner or bookeeper, for large companies, the required data must be obtained from sources outside the treasury department. While balance and transaction data are routinely available through electronic banking downloads, the activities that induce these transactions depends on sources that are sometimes less than cooperative.
Regardless of the size of the company, the bottom line is to regulate the billing, collection, payables and disburesements procedures. While the gathering of information varies and businesses will have diferent approaches, there are four key basics:
Credit Risk: Evaluating customers and assessing their level of credit risk is an important part of cash management. Unfortunately, many business owners and executives tend to shy away from these activities out of fear that requesting credit-related information will upset the customer and cause them to go elsewhere. It is never a good idea to use the extension of credit as a sales tool.
Collections: Once the customer relationship is established, the company's cash flow will be determined by how well the company manages the collections process. The elapsed time from the issuance of an invoice to receipt of the customer's check needs to be commensurate with the company’s cash requirements and adhered to. Most companies will encounter customers that are habitually slow payers. It is important to recognize these customers and either anticipate those delays and incoporate them into the forecast or discontinue credit privileges. It is seldom a good idea to use payment terms as a sales tool.
Payables: The Accounts Payable trial balance is essential to a solid cash forecast and, by extension, efficient cash management. That said, the value of the trial balance is diminished without timely entry of vendor invoices. Whenever possible, have vendors submit invoices electronically. To be valuable, the aged trial balance should reflect all upcoming payments for at least the next 30 days.
Disbursements: The payment protocal should be commensurate with industry standards but, more importantly, the company’s collections. Once the protocol is established, it must be adhered to. It is not a good idea to “play favorites” when processing payments.
Poor cash management is poor management. Be a knowledgeable manager and ensure that organizational data and information about cash requirements are organized and available for use. We help our clients develop and maintain a sound cash management system effectively using knowledge and technology adding several points to their ROI or simply keeping them from insolvency.
The unfortunate reality is that businesses fail. These failures can be for any number of reasons but the most common is poor cash management even when everything else is being done right. This is because so many business executives and owners place their entire focus on revenues and profit and fail to make cash management a business priority. No one will argue that revenue and profit are the ultimate goal of any business. They have little value, though, if the business cannot meet its payroll or trade obligations. Chapter 11 courtrooms are littered with profitable companies.
While the basic principles of cash management are relatively simple, the actual process of monitoring, managing and forecasting cash can be convoluted. For small businesses, the data is generally within the purview of the owner or bookeeper, for large companies, the required data must be obtained from sources outside the treasury department. While balance and transaction data are routinely available through electronic banking downloads, the activities that induce these transactions depends on sources that are sometimes less than cooperative.
Regardless of the size of the company, the bottom line is to regulate the billing, collection, payables and disburesements procedures. While the gathering of information varies and businesses will have diferent approaches, there are four key basics:
Credit Risk: Evaluating customers and assessing their level of credit risk is an important part of cash management. Unfortunately, many business owners and executives tend to shy away from these activities out of fear that requesting credit-related information will upset the customer and cause them to go elsewhere. It is never a good idea to use the extension of credit as a sales tool.
Collections: Once the customer relationship is established, the company's cash flow will be determined by how well the company manages the collections process. The elapsed time from the issuance of an invoice to receipt of the customer's check needs to be commensurate with the company’s cash requirements and adhered to. Most companies will encounter customers that are habitually slow payers. It is important to recognize these customers and either anticipate those delays and incoporate them into the forecast or discontinue credit privileges. It is seldom a good idea to use payment terms as a sales tool.
Payables: The Accounts Payable trial balance is essential to a solid cash forecast and, by extension, efficient cash management. That said, the value of the trial balance is diminished without timely entry of vendor invoices. Whenever possible, have vendors submit invoices electronically. To be valuable, the aged trial balance should reflect all upcoming payments for at least the next 30 days.
Disbursements: The payment protocal should be commensurate with industry standards but, more importantly, the company’s collections. Once the protocol is established, it must be adhered to. It is not a good idea to “play favorites” when processing payments.
Poor cash management is poor management. Be a knowledgeable manager and ensure that organizational data and information about cash requirements are organized and available for use. We help our clients develop and maintain a sound cash management system effectively using knowledge and technology adding several points to their ROI or simply keeping them from insolvency.
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