strategies of cash management

4 Effective Cash Management Strategies

Issue

Cash management is as simple as 1-2-3:
1. Take in as much cash as possible as quickly as you can.
2. Pay your bills.
3. Put the remainder back into the business.
Or is it? You may be surprised to learn that cash management is more complex than paying your bills and reinvesting the remaining funds.

Analysis

The first step in cash management certainly isn't brain surgery — bring cash into the business as quickly as possible. Bill promptly, follow up on overdue balances aggressively, require up-front deposits on sales whenever possible, offer discounts for early payment, etc. Then hold onto money as long as possible. Take as long as you can to pay bills without incurring late fees or damaging your business credit rating.
After this initial step, it's likely you will start running into some more complex questions. How can we know for certain that we really do have excess cash flow? What do you do with your excess profit? You may decide to invest it as a way of squeezing some extra profits from the business. But what if something goes wrong — you miscalculated your cash needs or owed a client a refund — and all of your money is tied up in investments?
To practice this second level of cash management you must first be able to accurately assess your current cash position and make reliable predictions of how much cash you are going to need in the future. Many entrepreneurs lack such expertise, so they turn to outside consultants who act as part-time chief financial officers. A cash management expert can help you make more detailed and useful assessments of your cash position, including monthly financial statements and cash flow reports. Then you can determine how much excess cash you really have and what to do with it.
Now that you know exactly how much cash you have on hand, you may be wondering what to do with it. When a company is growing rapidly it is usually not in a position to make large, long-term investments. Growth is unstable and unpredictable and large commitments to investments require stability and predictability of cash flow. But there are many ways you can start small:
1. Open a money market fund. At first, you can do what many families do to build up a small nest egg of working money. Set aside small sums each month in a money market fund. You won't get rich quick, but you will earn a greater return on your excess cash than if you put it in an interest-bearing checking or bank savings accounts, and the money remains readily available should you need it.
2. Invest in CDs. If your business' cash flow becomes so predictable that you have several months' worth of expenses in cash, you can invest in CDs. You will earn a higher yield but there will be penalties for early withdrawals should you unexpectedly need the money. This downside can be minimized by purchasing CDs in smaller denominations (which yield less interest) and staggering their maturity dates so cash is freed up at regular intervals.
3. Open a sweep account. Sweep accounts are trouble-free ways to squeeze the most interest out of small amounts of spare money. However, they make sense only if your bank's fees are less than the interest you will earn. There are two types of sweep account:

• Controlled-investment account: Every day, your bank will leave in your checking account only enough cash to cover the checks that were presented the night before for payment that day. The rest is swept, very early in the day, into overnight investments. Do not make electronic payments or wire transfers from controlled-investment accounts! They may be submitted for payment later in the day when your account has no money in it.
• End-of-day sweep account: Usually a safer bet for small business owners, this type of account waits until late in the day to determine how much to sweep into overnight investments. Typically, an end-of-day sweep account pays 0.1% to 0.2% less than a controlled-investment account.

4. Set up a lockbox account. Speed up posting of customers' payments to your bank account. Payments are mailed to a P.O. Box directly accessible by the bank, which processes receipts daily. You don't have to go to the bank (or send a subordinate) and stand in line to make deposits. Deposited checks don't sit in a teller's drawer all day, they are taken directly to the processing department. If your bank is regional or national you can set up lock-box accounts near your biggest customers, eliminating days of postal travel time for checks they mail to you.

The Bottom Line

Cash management isn't as simple as it seems. Its complexity, however, offers an opportunity for you to increase your assets. The strategies listed above can help you get the most out of your cash resources.
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