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Business Cash Management

What is business cash management?

Financial managers employ a variety of cash management techniques to minimize loans from outside sources and to ensure that there is sufficient cash on hand to meet obligations. Good cash management improves a company's profitability by shortening the collection timeline (thus increasing available cash), reducing operational costs, and slowing disbursements of cash. In general, business cash management is concerned with maximizing cash flow, maintaining a cash reserve, managing business lines of credit, and improving operational efficiency. Often, the decision of whether to lease or purchase assets is considered as well.

How can cash be managed efficiently?

It is necessary for your business to have enough cash on hand to meet periodic obligations and to support a cash reserve or savings account. However, too much idle cash represents a lost opportunity for investment. Cash balances and cash reserves are significantly influenced by your company's production and sales techniques, and by its procedures for collecting sales receipts and paying for purchases. For more information about cash reserves or savings accounts, see Maintaining a Cash Reserve.

It is important for you to know how to maximize cash flow, which is the measurement of the amount of cash flowing into and out of a business during a specific time period. Several cash management techniques exist to increase the inflow and slow down the disbursements of cash.

Inventory turnover
Turn over inventory as quickly as possible while avoiding drastic depletions of stock that might result in a loss of sales. Efficient inventory production management involves shortening the production cycle and increasing raw materials turnover.

Collecting accounts receivable
You should collect your accounts receivable as quickly as possible without losing future sales because of high-pressure collection techniques. Accounts receivable, like inventory, tie up cash that could otherwise be used to reduce outside financing or be invested in earning assets. Cash discounts for timely payment should be considered as one technique. Also, think about wire-transfer payments to speed up receipt of payment.

Accounts payable
You should pay your accounts payable as late as possible (without damaging the firm's credit rating), but take advantage of any favorable cash discounts for paying on time. Negotiate for favorable credit terms.

How can operational efficiency improve cash management?

Cash management can also be improved when you streamline the operational efficiency of your firm. Certain tools can help you manage your operations and resources in the most cost-effective manner. You should pay particular attention to inventory management, production control, purchasing and outsourcing.

What about lines of credit?

A business line of credit is an agreement between a commercial bank and a business specifying the amount of unsecured short-term borrowing the bank will make available to the firm over a given period of time. It is most often used by small businesses with short-term or seasonal cash needs or with unpredictable cash flow needs. You need to know how and when to apply for lines of credit and how they work.

Why should leasing versus purchasing business assets be considered under cash management?

Certain business assets (such as buildings, machinery and equipment) are necessary to the operation of most businesses. Because these items are so costly, it is important to compare the advantages and disadvantages of purchasing these assets outright versus leasing them from a third party.