Cash Management

Let me begin by making a few statements. First, “money is the most important asset your business has, period.” Some may argue that the most important assets are your employees. I would agree, but, if you have no money you cannot pay these employees to stay. Also, you may make mistakes in managing your employees, your customers, or your physical facilities and you can survive, but don’t mismanage your cash. If you don’t manage your cash flow, you can be forced out of business.  Second, “profits do not equal cash.” You may have a profitable business, but all your cash could be tied up on your balance sheet, like in your receivables and inventory.

 Now let’s talk about how to manage cash flow so that you can stay in business. I always believed that it was good practice to get into the habit of producing a weekly forecasted cash flow. As you can see from the example below, it’s really not that difficult to implement.

 Let’s look at the components of this forecasted cash flow:

 Opening cash balance – I suggest you start at the beginning of a month after you have reconciled the general ledger cash account to the bank. In this example I’ve used $50,000.

  •  Cash inflow – When you forecast cash inflows, you would look at such items as: receivables being paid, tax refunds, interest earned in the business bank account, etc. The key is sitting down with your receivable person and determining what cash is expected to be received that particular week based on calls to your customers.
  •  Cash outflow – Usually you will have such items as: payroll, accounts payable cheque run, any automatic withdrawals from your business account, such as lease payments, etc. Your accounts payable person should be able to look at cheque runs for the last six months to forecast this number.

 Each day that goes by you need to update the spreadsheet with what actually happens. Did you actually receive $8,000 on Monday? Was your cheque run $15,000 on Thursday? Enter the actual into the spreadsheet and note why there were variances, i.e. the $8,000 was made up of three customers and only two paid. Do the same for the expense side. At the end of the month you need to reconcile the general ledger account once again and it should match up to the ending cash balance. Finally, don’t be surprised if you find in the beginning that you over estimate your cash inflows and under estimate your cash outflows. Over time you will perfect this exercise.

By: Anthony Pichelli, CMA  (Investment Advisor – RBC Dominion Securities)

Office: 416-733-5255 Cell: 416-315-3183 anthony.pichelli@rbc.com

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