Cash Management –It’s Not About the Cash Account

As I’ve listened carefully over the years to business owners and individuals alike, it occurred to me that there is considerable confusion about cash management.  For example, I commonly hear people say something like, “We’re really watching our cash closely” or “We keep a close watch on our cash balance” as if that was going to somehow produce more cash.  I got the impression they thought this was Cash Management.  It’s not.  So let’s talk about what cash management really is, and let’s do so by first describing a few things that it is not.

Cash Management – What It’s Not

Including the items above, here are some things that cash management is not:

  • Watching your cash balance closely
  • Making sure you record all transaction that affect the cash account in a timely manner
  • Waiting until the last moment to pay your bills
  • Selling more so you can hope to get more cash
  • Paying your employees late

Okay, I could go on and on with this, but there are two basic points I’m trying to make.  One, watching your cash closely is common sense, but it is not cash management.  Two, playing games with the timing of payments to vendors and employees and wishful thinking for more cash also are not cash management.

Cash Management – A Simple Definition

Cash Management is the process of planning, coordinating, and directing business activities that directly and indirectly impact the cash balance of a company.

If you read my earlier post, Balance Sheet Management – Make It Simple this definition will sound a lot like the definition of balance sheet management.  The difference is that here I am focusing in on a particular part of the balance sheet.  By doing that, we can begin to identify the activities that will have the greatest impact on your cash balance.

That leads us to the need to define the purpose of cash management.

Purpose of Cash Management

The Purpose of Cash Management is to increase the likelihood that a company will have adequate cash for current and future obligations.

This is of course a simplification, yet in a nutshell it is what we are trying to accomplish and in keeping with the KISS (Keep it Simple Stupid) concept, which reminds us not to over complicate things.  This definition provides a simple framework for us to work on maximizing cash.

What Activities Does Cash Management Involve?

The short answer is everything.  But, the reality is we can do the most by focusing on a few key areas.  Some of these areas are:

  • Accounts Receivable, Credit Policies, and Sales Management
  • Inventory Management
  • Capital Equipment (Fixed Assets)
  • Accounts Payable Policies
  • Debt Management
  • Employees
  • Expense Controls
  • Budgeting

The truth is that some of these areas overlap, such as inventory management and accounts payable policies or capital equipment and debt management.  However, it is generally easier to address one area at a time.  As you do, you will begin to notice favorable effects on other areas.

I will be discussing some of these areas in more detail in the future.  Be looking for blogs about Budgeting, the Big 4 Capital Users, Inventory Management, Employees, and others.

While this can seem rather dry, I think you will find that this process will provide you greater confidence that you will have the cash you need to meet current obligations and future growth needs.  Of course, if you think you may need some help in any of these areas, please contact us at this link: AimCFO – Contact

As always, your comments are welcomed.


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