The Importance of Cash Management

One of the most common mistakes business owners make is not taking the time to learn about cash management. When you start a company, you may hire a bookkeeper to enter orders, create invoices, enter bills and reconcile bank accounts. The software products that are used can generate a profit and loss statement, balance sheet and statement of cash flows. A new business owner may think this is enough and may operate this way for some time. If the business hits a hard time with lower sales, unexpected expenses or problems with employees, cash flow will become one of the most important areas that can mean surviving this hard time or not.

Most basic software programs do not have adequate cash tracking. It is important that you either develop a system yourself or hire a part time CFO or accounting consultant to help you get a handle on cash. The systems that will work best are real-time cash tracking of what is in your account, plus what payments you receive from customers, less what needs to be paid. Having a forecast that isolates week to week cash flow will help you plan and make sure you are covered. When cash is tight, planning week to week can make a difference between being able to make payroll and pay other necessary bills or not. Using this same tool to plan out cash for the year, as a part of your budgeting process, can prevent unexpected shortages in cash and can help you plan for seasonal cycles in cash flow. If you see certain times that cash flow is negative, you can make the necessary arrangements to get financing or plan for a cash injection.

In many instances not planning ahead can create a ‘snowball effect’ that can leave the company in a very bad spot financially. Once this occurs, it is very hard to recover. If finances aren’t something you know much about, cash management should be on the top of your priority list to gain an understanding of.  This is another time to hire an accounting consultant to come in and assess your processes and make recommendations as to what can be made better. They can also be used as a teaching tool for you to understand the relationships between common financial reports and ensure all your bases are covered.

According to the Small Business Administration (SBA) two-thirds of new businesses fail. If you asked an accountant or CFO to analyze those that have failed, in many cases the lack of cash management and knowledge in this area would be cited as a top reason for failure. For this reason, it is important that you get a handle on this part of your business.


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