Cash Management - What it is and what it isn't

I love seeing the wide variety of businesses around the world. It’s one of the reasons that I enjoy working with small to medium sized businesses – there is so much variety and so many ways that people have figured out how to make money. They are so innovative, and it seems like it would be so fun to be part of the team!

These companies generally have:

  • Innovative products and services
  • Great demand-generating marketing
  • A good sales team
  • Operational excellence that is generally close to the skill of the founder

After that the business often has weak spots. They generally lack systems and operations that will allow them to scale, especially when it comes to accounting, finance, and cash management.

Between my experience and the conversations that I’ve had with various accountants, bookkeepers, and business consultants, I’m convinced that 90% or more of small and medium sized businesses don’t have good financial management. This includes basic bookkeeping. That falls in line with the Small Business Administration (SBA) study that indicates 82% of all business failures in the United States are a direct result of poor cash flow management and poor understanding of cash flow or cash flow problems (see SCORE.)

Let’s Start with What Cash Management Is Not

When I start to talk with business owners about cash management, they always want to talk about bookkeeping, financial reports, tax returns, the number of miles they earned on the company airline credit card, or half a dozen other topics that revolve around their company’s finances and their financial history.

I love the responses I get back when they think they have an idea of what I am asking them. Here are some typical responses:

  • “I used to have a problem with managing my cash, but I hired a new bookkeeper and now the books are always up to date and I know what’s in the account within a day or two.”
  • “We manage our cash. I have a fantastic sales forecasting tool that goes out two years and we update it every week.”
  • “Cash management? We’ve got it covered. We use new cloud software to do our billing. Our customers get their bill within 24 hours of us completing their service.”

I’ll finally have to stop them and explain that cash management not about financial reporting, long-term growth predictions, or how fast you bill your clients (although client billing is a small part of it.)

Cash management is taking responsibility for the money that the company has, controlling when cash goes out of the business, as well as managing the process of when cash comes into the business.

Let’s look at why the examples of forecasting, bookkeeping, and billing are not part of cash management:

Sales Forecast: A sales forecast isn’t a cash forecast. A sales forecast generally helps you understand the big picture – who are your best customers, what are your product sales volumes, and maybe even predicting your profit margins. What they usually don’t do:

  • Tell you when you will get paid for the sales
  • Show you if you have the cash to pay on time for the products that will be sold
  • Help you know if you can make payroll in two months, let alone in two years

Bookkeeping: Knowing your historic financial records will help you understand your business. Having an up-to-date bank balance is a small step in managing your cash, but it doesn’t answer any of these questions:

  • Is there enough cash that the checks you’ve already written will clear the bank?
  • Can you make payroll next month or the following?
  • Will you be able to make the balloon payment on your loan in three months?

Billing: Sending the bill is only one small part of accounts receivable. In addition, you need to know:

  • Are you sure that the bill was received by the intended recipient, and not just sent?
  • Do you have a process to confirm with the client that the invoice was correct?
  • Who is tracking when a payment is not received on time and what do they do about it?

Sometimes the Cash Management Helpers Aren’t So Helpful

Part of the challenge that business owners have is that cash management tools and standard “go-to” experts are extremely focused on optimizing one part of the company. They don’t look at the big picture to help provide a total cash management method, let alone the ability to forecast cash and make decisions based on the forecast.

Let me give you some examples of how cash management tools and experts help, but usually fall short of implement cash management into a company:

Bookkeeping software

What is does: Bookkeeping software is designed to record historical records, tell you who you owe money to and when, who owes you money and how past due it is, and give you a lot of reports on all this information.

What it doesn’t do: Bookkeeping software does not give you accurate forecasting of what your cash balances will be, show you a calendar when your bills are due, easily move payment dates, or communicate with clients when they are past due.

Specialty software

What it does: There is specialty accounting software for dozens of accounting and financial management niches. Each one will help in a specific area and may provide a small contribution towards managing your cash.

What it doesn’t do: Specialty software doesn’t show you a big picture, tell you how much more you need to pay your bills in two weeks, let alone in two months or further out.

Bookkeepers

What they do: Hopefully, you have a bookkeeper who knows accounting rules, is accurate, and knows how to generate reports. If you don’t, stop reading this and go hire an accountant to fix the problems in your books. Seriously. Do it now. Call or email me if you need help finding someone.

What they don’t do: Most bookkeepers will have no idea of how to manage cash or give advice on cash management. If they do, it will be very focused on bank accounts, credit lines, and maybe one or two small areas of the business. Here’s a test: ask them to put together a cash management spreadsheet for you.  Most will ask you what you mean or to specify what you want. Most of the rest will give you a sales forecast. About 1% will give you a spreadsheet that you can use as a tool to accurately track your cash income by client or key revenue source, and your expenditures by detailed expense line.

Accountants

What they do: Accountants will ensure that your financial records meet GAAP rules, adjust entries based on those rules, do your taxes, create reports, audit your books, and help with other specialty services revolving around your company’s finances.

What they don’t do: Accountants, in general, are not trained to fix problems. They are good at preparing financial statements and telling you what financial problems you have, but usually these are only symptoms and not the real problem. They are not trained to dig into the business, find the root of the problem, and recommend fixes unless the problem is related to creating and recording financial transactions and record keeping.

Text books

What they do: Text books are designed for university classes and are generally written with large corporations in mind. The cash management focus is on the “treasury” aspect of a corporation – the specialists who watch over the treasury. Treasury? Hmmm…. Do you have gold and diamonds that you need watching? If you do, text books are good resources.

What they don’t do: Textbooks don’t look past the finance department for cash management. They don’t look at small to medium size businesses. These businesses have dozens of tools at their hands that involve client relationships, vendor partnerships, inventories, or dozens of creative ways to manage cash.

Very Simply, Cash Management Is…

Cash management is making active decisions about when to pay your bills, working with your clients to ensure payments are made both when and how they are expected, and making business decisions that help you plan both when you get paid and how much.

Cash management:

  • Covers every aspect of your business.
  • Involves people, not just money
  • Is a mindset and a way of thinking
  • Requires active involvement
  • Is ongoing
  • Requires creativity

You know that you are managing your cash when

  • You know at the end of a work week that the bills will be paid, or how short you will be.
  • You know about how much money will come in next week.
  • You have a list of a few more things you can do to improve your company’s cash position.

What does cash management give you in return for the time and effort?

Peaceful sleep and relaxing weekends.

What Does Your Cash Management Picture Look Like?

Now that you’ve read my take on cash management, are you looking at it differently?

I’d love to hear any ideas you have.

Is there a topic you’d like to learn about? Contact me at [email protected] to introduce yourself, share ideas, or ask me questions about managing your business’ cash.

David Safeer has helped businesses implement cash management systems that create business breakthroughs since 2002. He founded The Cash Management Project in November 2018, to help businesses manage and maximize their cash resources.  David writes, teaches, and works with diverse companies around the world.

Thinking globally, one business at a time.

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