So what is cash management? Briefly, it’s the strategy by which an individual (or a company) collects, manages, and invests its cash. And why is it so important?
Managing cash successfully is crucial for family businesses for the following reasons:
- To ensure that there is plenty of cash-in-hand for day-to-day expenses, like paying staff, rent, utilities, suppliers etc.
- To ensure that there’s cash available for unforeseen circumstances
- To improve the business’s overall profitability
- To ensure liquidity and to avoid insolvency and bankruptcy.
Liquidity and the impact of cash management
In investment terms, liquidity is the amount of capital to which a business has access for spending and investment, and in accounting terms, liquidity refers to the ability of current assets to meet current liabilities. Simply put, it’s how easily assets can be converted to cash, without a loss of value – to meet a company’s financial obligations, to buy other assets or to invest.
The goal of any business is to manage its affairs so that the amount of cash on hand is maximised. The more cash is reflected on a company’s balance sheet, the more liquid it is. So, good cash management makes for a more liquid business, whereas poor cash management means less liquidity.
Cash flow is the life-blood of a business, goes the old adage. Doing business means incurring costs – unfortunately, these expenses can arise before payment is received for goods or services rendered…
Managing and improving cash flow
If a business fails to meet its financial obligations in time, because of a lack of cash, it’s said to be insolvent. A family business which fails to manage cash flow adequately will soon go bust. The key to a business’s success (and longevity), therefore, rests squarely in managing its cash flow – that is the money flowing in and out of the business – optimally.
A positive cash flow is when the money coming in is greater than the money going out (good for business), while negative cash flow is when money flowing out it greater than the money flowing in (bad for business).
In order to be able to grow your business and increase profitability, it’s necessary to structure a business so that it has a positive cash flow.
Manage your cash flow better
- Make realistic projections of your business’s cash needs – this way, you know what you’re in for on a daily, weekly, and monthly basis, and can budget accordingly.
- Watch your payment terms – many companies extend terms to their customers, either because they’re desperate to land the business or because they lack the assertiveness to decline their clients the option of paying over thirty or sixty days. If you want to make sure you get your money in on time, though, no more Mr Nice Guy – insist on Cash on Delivery (C.O.D).
- Offer various payment methods – allowing customers to pay via credit card or online payment facilities like PayPal may cost you a little in fees, but can boost your cash flow nicely.
- Offer early settlement discounts – this can incentivise your clients to pay their invoices early (or on time).
- Negotiate terms with your suppliers – to help you manage the outflow of cash from the business.
- Establish effective invoicing measures – don’t wait until month-end to capture invoices for the entire month’s work; rather invoice clients as and when a job is completed and make sure invoices are sent timeously.
- Tighten up your debt collection – ensure that it’s someone’s job to monitor what payments are outstanding and to firmly remind clients of their payment obligations.
- Stick to your budget – when money comes in, don’t be tempted to overspend!
- Secure credit – business loans, overdrafts. or lines of credit can be useful in tiding you over during periods of short-term cash flow challenges. However, this shouldn’t be seen as a viable long-term solution to cash management.
- Increase sales – generating additional income seems like the obvious way to encourage positive cash flow. While increasing sales and gaining more customers is the end-goal of most businesses, make sure these are cash – not credit – sales, so that you end up with cash-in-hand, not merely greater accounts receivables.
Managing cash successfully is a critical step in securing the longevity of your family business for future generations. What challenges have you faced in meeting your family firm’s financial obligations?