Cash Management
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Effective cash management is one of the cornerstones in small businesses. No financial goal can be achieved without proper cash management. Goals often overlap, but cash management is at the center of it all. Its the fundamental building block of financial planning. Thats why its imperative to understand your cash management situation (2006). Various methods of short term financing can also be essential to a successful business. Both cash management and short term financing will be discussed throughout the paper. Managing your working capital, managing business risks, and monitoring costs and inventory are cash management techniques to be discussed.
Managing your working capital is very essential in cash management. Your level of working capital is intimately related to the flow of cash into and out of your business. Simply stated, you need enough working capital to setup the business, pay operating costs, and continue to operate until payment arrives 30, 60 or maybe even 90 days later. But if youve used a lot of that working capital to pay for fixed assets, you may come up against a crash crunch that prevents you from paying suppliers, buying materials and even paying yourself a salary. Its a good idea then, to maintain a level of working capital that allows you to make it through those crunch times and continue to operate the business. Short-term financing such as a line of credit (LOC) can be used to make emergency purchases or to bridge the gap between months-end payables and receivables. An LOC can be negotiated with your financial institution, and this should be done before any need actually arises (BDC, 2005).
There are many risks involved in running a business, and serious challenges should be expected at some time in the future. You can reduce the risk of cash-crunch due to this type of situation, by planning ahead and having a more diversified client base. If youre not dependent on one large order or client, your livelihood doesnt hinge on the health of someone elses business. Finding new clients will increase revenue, improve your cash flow situation and make you less susceptible to marketplace adversity (Investopedia, 2005).
Monitoring costs and inventory is very important in business and cash management. Make sure youre getting the best possible deal from your suppliers. You can do this by shopping around and getting quotes from other suppliers. They may not be able to give a better price, but may be able to offer better payment terms making it easier on your cash flow situation. Analyze inventory turnover to determine which items are selling and which are duds that are soaking up your working capital. Try to keep inventory levels lean so that your working capital isnt tied-up unproductively and unprofitably. Finally, if you feel you need help managing inventory or making cash flow projections, BDCs consulting services can help you implement working capital strategies that are just right for your business (BDC, 2005).
Short term financing is essential to provide businesses funds for a short term period of a year or less. These funds are usually for businesses to run their day-to-day operations including payment of wages to employees, inventory ordering and supplies. An example of short tern financing could be when a firm places an order for raw materials, it pays with finance and anticipates to recoup this finance by selling these goods over the period of a year (Encyclopedia Britannica, 2005). There are many methods for which businesses can seek short term financing. Some include overdrafts, bills of exchange, promissory notes, and inventory loans.
An overdraft is the amount by which a check exceeds the available balance in a checking account. It is also described as the negative account balance that results when a depositor writes checks exceeding the account balance. Bank customers who have an overdraft line of credit, called Overdraft Protection can write checks for more than the account balance whenever they want, without fear that their checks will be returned or they will have to pay overdraft check fees for