Monday, May 10, 2010

Cash Management and Cash Management Techniques

Cash management in this economic environment is crucial. Cash is the life-blood of any business. As the saying goes, "Cash is king". With so many banks having tightened credit standards due to what has happened in the credit markets or within their own lending portfolios, and new and more restrictive government mandates, it is crucial that businesses fully understand their cash needs IN ADVANCE and make adjustments to their operations to ensure that cash is available. Otherwise, companies may find themselves in a liquidity crisis - unable to meet payroll, pay suppliers, or pay contracttors - which can lead to bankruptcy or an operational shutdown.

As I've stated before, cash is NOT income or profit. You can show a highly respectable net profit (margins of 10-15% or higher) and still be cash flow negative. Stated another way, your income statement can look like you're doing very well, while your bank statement tells a completely different story.

Unless you manage your cash appropriately, you will likely struggle financially trying to come up with cash to pay your employees and your suppliers. This unplanned cash flow shortage is a big reason many companies go out of business during a recession. Yes, many go bankrupt because they lose key customers. But many who seem to be doing phenomenally well during the boom times also go out of business. Why? Because they owe their success to continually adding new customers. When the new customers disappear or the rate of adding new customers drastically decreases, other operational issues like poor receivables management, poor supplier relationships, and other issues taht directly impact cash management come to light.

How does this happen? Well, new customers create overlap so payment come in that can cover the cash outflow spent servicing existing customers or paying out on poorly structured commission plans. You must make cash management an integral part of budget planning and analysis in order to plan your cash needs and manage your cash appropriately.

To be continued on Wednesday, May 12.

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