- Being aware of the business’ cash position
- Actively guiding the business towards attaining more cash
- Maximizing the return on cash reserves
To put it simply, you need to know where your cash is, plan its path through the business and how to make the most of every rand.
Think of cash as the fuel that runs your business. Lacking cash can leave you stranded on the side of the road while the competition zooms by. A business, like a car, won’t go anywhere without fuel. The last thing you want is to be walking for miles with a fuel can in your hand.
Accordingly, you must be aware of how much fuel you have in your tank at any time. You must understand the efficiency in which your business is burning it, where your next fill-up is coming from, and how well your reserves are performing. How do you monitor all this? By implementing an effective cash management system; which forms a part of every well managed company’s financial controls.
A Cash Control System
Managing this vital component requires the use of simple, well-documented control systems for the money flowing through the business. It needn’t be an overly complex system, but it must cover two categories: money coming in and money going out.
Money coming into the business includes:
- Sales Receipts
- Credit Transactions
- Invoicing and Accounts Receivable
- Money going out of the business includes:
- Accounts Payable
- Inventory Control
Keeping the Cash Flowing In Every Stage of Business
The complexity of your cash management systems will depend on your business’ stage of development.
In the infancy or young stage of a business, you’re likely to experience periods of growth. Your cash is cycled from revenue to expense very quickly during this time, allowing just enough cash flow to add resources or fulfill demand. If at any point during this stage, there is a major cash shortage, you could be in big trouble. Your cash management system provides an early detection system for such events and allows you to make adjustments before it’s too late.
As your business matures, your cash management priorities shift slightly from a purely internal perspective to a more balanced internal and external focus. Cash on hand and meeting the day-to-day needs of your business is always top priority, but cash is too valuable to be sitting around doing nothing. Businesses with cash reserves can create competitive advantages through joint ventures, acquisitions, research and development, traditional savings and smart investments. While many of these activities may seem more likely for large public corporations, by focusing your efforts in a similar fashion, cash savvy small companies can leverage their cash position as a competitive strategy.