Wednesday, May 12, 2010

Cash Management & Cash Management Techniques (cont'd)

We will address some of the ways to manage cash. But the all important first step is to check your cash flow statement weekly, if not daily. You cannot maange anything if you don't even know what's going on.

Ways to manage cash:

  • Obtain terms from your suppliers on your materials and supplies. If you can get 30-45 day terms, you can reduce both the amount of the negative cash flow and the length of time cash flow is negative.
  • Use contractors instead of trade or part-time personnel and subject them to the same payment terms you are under with your largest customers. Thus, instead of paying trades people and/or part-time employees every 15 days, you pay the contractor within 30 days of the submission of the invoice. In both of these instances, you align your cash outflows with your cash inflows as a way of negating or minimizing negative cash flow.
  • Of course, quality (and safety, for manufacturers, construction companies, and similar) is often a concern when you utilize a high number of contractors whose performance and sourcing you cannot directly control. Shoddy work leads to poor customer performance and additional expenditures tied to correcting mistakes. Consequently, over-dependence on contractors can lead to cash flow shortages and other operational issues.
  • Obtain or increase your line of credit. A credit line can really help with cash management and working capital. Working capital = short term assets - short-term liabilities. This typically translates into working capital = cash + account receivables - account payables - payroll payables. You can use your line of credit to pay payroll or purchase supplies when you cannot get terms. If you do not have a line of credit with a bank, pursue one. Cultivate a strong relationship with a banker at Vice President (or equivalent) level and above. In these economic times with the credit markets still roiling and many banks dealing with issues in their own lending portfolios, strong relationships play an even larger role in obtaining credit than a year and a half ago.

Final segment: Friday, May 14.

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