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Cash Management for Your Business

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Cash Management for Your Business

Cash management is very important to the success of your business. According to some business analysts, the principal reason for the failure of a business is poor cash management. Entrepreneurs often encounter this problem in their business. However, having a thorough grasp of the fundamental ideas of cash flow will assist you in preparing for any unexpected events.

Cash Flow Projection

It is advisable to prepare cash flow projections well in advance so that you will be able to identify any impending problems you might encounter in the near future. Thus, yearly, quarterly, and even weekly cash flow projections would be helpful in preventing any financial crises from occurring. It would be wise to refrain from making the assumption that all receivables will continue coming in as timely as they have been, and that you can extend payables for as long as you previously have.

Cash Receipts

You can begin your cash flow projection by combining cash on hand at the start of the period with additional cash to be received from other sources. By speaking with sales representatives, employees who work in collections, and members of your finance department, you will be able to ascertain the amount of cash you are going to receive in the forms of payments from clients, interest income, service fees, and collections of bad debts.

Cash Expenditures

The next step in preparing cash flow projections is knowing the amounts and dates of imminent cash expenditures. Therefore, you should be aware of the dates on which each payment will be made, and on what the payment will be spent. There should be a line item on your cash flow projection for each major expenditure, including, but not limited to, the following:

  • Rent
  • Salaries and wages
  • Inventory
  • Equipment
  • Utilities
  • Advertising
  • Office supplies

Improving Your Cash Flow

By including some of your company’s policies and procedures in the language of the contracts you have with your customers, you can avoid any problems in the future. For instance, if you would prefer to receive a security deposit on some orders, include that requirement in the contract. However, in cases in which customers are reluctant to leave an initial deposit, one alternative is to negotiate payment terms and include these in the contract. For example, in a construction contract, you may wish to arrange to pay the contractor a percentage of the price upon completion of each part of the construction project.

Another way in which you can improve your cash flow is by handling your receivables. Specifically, you can improve the rate at which you change materials and supplies into products, and receivables into cash. Here are some of the steps you can take:

  • Provide discounts to customers who make their bill payments quickly.
  • Request that customers leave a deposit when placing an order.
  • Make credit checks a requirement of all new customers who are not paying cash.
  • Send out invoices immediately, and follow up right away if payments are not received in a timely
  • manner.

You can also improve your cash flow by handling your payables. If you find that your expenses are increasing at a faster rate than sales, you may wish to employ these techniques for controlling costs:

  • Use creditor payment terms to your advantage. For example, if the due date of a payment is 30 days from now, do not make the payment in 15 days, but rather give yourself nearly 30 days to pay the bill. With business contracts, it is perfectly acceptable to wait until performance is actually due to fulfill your part of the contract.
  • Use electronic funds transfer to pay your expenses on the last day on which they are due. In so doing, you will stay current with suppliers while being able to use your funds for as long as possible.

Avoiding Cash Flow Problems

One way you can avoid damage to your cash flow is to take steps that imply a reluctance to perform on the contract if you have reason to believe that the other party will not fulfill his or her obligations. This is called anticipatory repudiation. The non-breaching party can now treat the breach as immediate, terminate the contract, and file a lawsuit seeking damages. However, you can contend that you thought that the other party would renege on the contract, and offer evidence to support this belief.

Seeking Legal Advice

If you are experiencing problems with the cash flow of your business, you should consult a business attorney who can help you employ strategies that will improve your cash flow and overall cash management.

Photo of page author Roxanne Minott

, LegalMatch Legal Writer and Attorney at Law

Last Modified: 07-06-2015 11:33 AM PDT

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