Cash Management

Douglas C. Jacobs CPA - Stephenson & Warner Inc.,

Cash is king, a popular phrase in these times, is a key business fundamental.

An enterprise increases its likelihood for successful outcomes when cash is sufficient; without cash, there is no sustainable enterprise. Sufficient cash allows management to focus on the mission of the enterprise, the opportunities of the day, and the strategy for the future. The enterprise can deliver the results its customers need and want. Without sufficient cash flows, the short term is likely to be in a crisis mode with less stability on a day to day basis. Consequently, long term sustainability is compromised and jeopardized.

Business practices that support and enhance positive cash flows are a business discipline. As a discipline, the consistent and routine practice is paramount to the successful outcome.

Practical considerations include always knowing what the cash balance is. The cash balance is not the cash in the bank. The cash in bank represents the transactions recorded by the bank; it does not include the checks written and deposits received that are not yet processed by the bank. The true cash balance is the amount recorded in the accounting records for the enterprise; that is, provided that all transactions are timely posted to the accounting records.

Another important discipline is to regularly prepare cash forecasts for the next three to six months and beyond, depending on the business cycle. Cash forecasts should be updated and routinely used to anticipate future liquidity surpluses and shortfalls. The cash forecast should be simple and easy to understand. The forecast must show exactly what is going on with the cash. Enterprises that routinely borrow funds will very likely be required to provide the lender a cash forecast.

A third discipline is calculating and monitoring asset turnover. Examples include accounts receivable and inventory turnovers. The higher the asset turnover, the better cash flow will be. Slow asset turnover ratios indicate that the enterprise is forgoing its cash by maintaining accounts receivable and inventory that are excessive.

Net income does not equal positive cash flow. Net income is a component of cash flow; other significant components include borrowings and debt service, capital expenditures, inventory, accounts receivable, accounts payable, and other transactions not affecting the net income. The cash forecast includes the net income and these other components.

How well does your organization practice the above considerations and disciplines? Has the organization been limited by cash constraints? If these questions and concerns resonate with you then please contact us for assistance. We are able to assist you and your organization to develop best practices with your cash management.