Without adequate cash flow and/or access to capital, you cannot survive, let alone grow a business. Increasing cash flow and minimizing the amount of cash required to operate a business on a day-to-day basis is a strategic business imperative.
There are two types of cash in your business:
Operating cash is used to run the day-to-day operations of the business. Controlling operating cash is a first step in improving cash flow and minimizing working capital.
Strategic cash is held to meet specific strategic business objectives. It is not used in the daily operation of the business. Strategic cash should be managed separately and segregated from operating cash.
Cash touches every part of a business. It is an integral part of the revenue and expense cycle. Cash needs to be carefully managed to minimize the investment of operating cash in the business. Include cash in the working capital of your company for performance measurement purposes.
The operating units make sales and purchasing decisions that impact the amount of cash required to run the business. Including operating cash in the asset base of operating units for performance measurement purposes is a good starting point in controlling cash. The operating people (i.e., sales, marketing, supply chain, purchasing, and, sometimes, manufacturing personnel) will then devote effort and resources in helping to develop and maintain an efficient and controlled cash-gathering and disbursing system.
Your AR team can help control cash by reviewing the entire cash-gathering and disbursing cycle and looking for defective processes, non-value-added work, and opportunities to speed the flow of cash through the system. This could be part of a larger working capital management program to drive defects and non-value-added work out of all operating and administrative processes and to make them error-free, faster, and more flexible. Part of the cash flow analysis should be to look for opportunities to simplify the cash management system.
Reducing the number of points at which cash can enter and leave a company and minimizing the number of transactions that are processed will increase the control you have over the cash management process.
Five steps To Improve the Management And Control Of Cash
1. Establish a centralized cash management function and manage cash flow and balances every day. Have well-defined procedures to follow in carrying out cash management duties.
2. Select a strong cash management bank and utilize an Internet-based cash management system for daily cash management.
3. Minimize the number of bank accounts and close all bank accounts not under the direct control and operation of the central cash management function. You may have to close plant and warehouse bank accounts. These accounts can be replaced with purchasing cards. All checks received at plants and warehouses should be deposited in a centrally controlled account.
4. Close all petty cash accounts. Utilize properly controlled purchasing cards and expense accounts in place of petty cash for miscellaneous small cash purchases.
5. Utilize purchasing cards for small value sales and purchases. Have all large customers and suppliers use and/or accept electronic payment through a bank.
Those five steps will help you significantly reduce the amount of cash required to operate the business.
Here is some other helpful advice: Be sure you have complete separation of duties in cash management. The basic controls are separation of cash management and accounting activities. This includes separating the functions of depositing cash and checks, check writing and bank transfer, and cash accounting. The accounts receivable management team must have no access to cash or accounting. Do not allow one person to manage the entire cash process. People can be cross-trained, but the functions must be separated for control and prevention of fraud.
All the steps listed are directed toward making the cash-gathering and disbursing system simple to operate and very fast, flexible, and highly automated. This should minimize errors, improve control, and minimize operating cash balances.
Blog by Wayne Smith, founder and president of Working Capital Concepts LLC and author of “Mining the Ca$h Hidden in Your Business: Increase Cash Flow and Decrease Financing Requirements by Reducing Working Capital”
