The Art of Cash Management

Tips on understanding and implementing cash management strategies. Includes how to maximize cash flow, assess your current cash position, and evaluate investment account options.

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No financial discipline is more important--and more misunderstood

Does Jeff Chasin's story sound familiar? Chasin and a partner started Commercial Credit Co. LLC, a high-tech equipment-leasing company in Irvine, Calif., just two years ago with $5,000 in personal savings. Their financial formula: land some big clients, try to collect from them quickly, and then reinvest all the proceeds into the business.

So far, the formula has clicked, pushing sales up from $11 million in 1997 to a projected $20 million this year. But with that kind of superfast growth, cash management has become a complex issue for Chasin and his partner. "At first, all we needed was a bank checking account and a package of Quicken software to keep track of sales and key financial results," Chasin explains. "But after about a year, we realized that there were all kinds of questions we were too busy running the business to ever answer. Like, what should we do with whatever excess cash we might have, and how would we really ever know for certain if we did have any excess cash?"

If you haven't considered such questions, you may be undermining your company's long-term prospects--and even its short-term stability. Indeed, there may be no financial discipline that is more important, more misunderstood, and more often overlooked than cash management. "Business owners should be thinking about this issue from day one," emphasizes Stephen King, president of Virtual Growth, a New York City-based financial-consulting firm that handles outsourced comprehensive accounting services for companies. But most don't--because they've got other issues on their minds. So long as more money seems to be coming into the business than going out, many company owners don't give cash management a second thought. And that leaves them vulnerable to all kinds of cash-flow dangers.

Luckily, the first step to improved cash management isn't exactly brain surgery: just start maximizing cash flow. "There are often ways for companies to improve their cash position simply by making certain that their billing, collections, and payables systems are operating as efficiently as possible," King observes. Aim to bring cash into the company as quickly as possible: bill promptly, aggressively follow up on overdue invoices, and, if possible, require up-front deposits when making sales. (See "Cash Management Tools," below, for additional ideas.) Then hold onto your cash as long as possible by managing your payables. That means, quite simply, take as long as you're allowed--without incurring late fees or interest charges--to pay your company's bills.

To practice a more elaborate form of cash management, you must be able to accurately assess your current cash position and make fairly reliable predictions at key intervals about how much you'll need to meet the company's expenses. Jeff Chasin and his partner were not confident about their expertise in that area. That's one reason they hired Donna McGovern, an accountant and the owner of Ideal Business Solutions, in Westminster, Calif., to serve as a part-time chief financial officer.

"They were worried about something that's a real risk for fast-growing companies," she recalls. "What if they were in a position where they had built up some excess cash and they then decided to invest it as a way of squeezing some extra profits from the business? And then, something went wrong, like they had miscalculated their cash needs or owed a client money but had their funds tied up in the wrong kind of investments?"

With McGovern's help, Commercial Credit started preparing more finely detailed (and more useful) monthly financial statements that included cash-flow forecasts. "When a company is in a fast-growth mode, it's not usually in a position to make large, long-term investments, because it will need to self-finance some growth opportunities," she notes. "Still, once you understand your cash position, you can often follow a course similar to the one families follow when building up an emergency nest egg: put small amounts of extra cash in a money-market account, on either a monthly or quarterly basis. Granted, you won't earn a fortune, but you will earn some interest while keeping the company's funds accessible."

If your company's cash flow becomes so predictable that you can set aside sums for several months or more, you might be able to make a slightly greater commitment by purchasing certificates of deposit. Although there are penalties for cashing in CDs early, those penalties should be manageable in an emergency. To minimize the risk, buy smaller CDs and try to stagger their maturity dates.

But exercise judgment. The biggest cash-management mistake a business owner can make is to take huge risks when investing spare cash. That's because it's all too easy to lose your company's cash cushion, and possibly even to jeopardize your business's survival, by making inappropriate investments (such as a risky gamble on stock-market futures or on some tiny stock you learned about on the Internet). Unfortunately, there are plenty of brokers and investment advisers willing to peddle such investments to business owners.

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