If your goal is to manage your cash more effectively, you need to anticipate when, where and how your cash needs will occur, and to involve your employees in the process. Here are a few strategies that can help you power up your cash-management processes to enhance operations.
Study variances in budget vs. actuals: One important tool for effective planning and monitoring of cash is comparing your actual operating results (sales, cost of sales, expenses and net income) to budget, then analyzing and identifying the reasons for any differences. Review monthly reports carefully, and be sure to follow up on your analysis of any variances so the reasons can be understood and appropriate corrective measures taken. The discipline of writing down reasons for variances is excellent training for your staff, and it will be useful information when you meet with your managers — or your investors or bankers.
Implement an authorization process: The central place that cash occupies in any business means that controls over cash provide additional benefits across all your business operations. For example, ensuring that invoices are properly authorized and approved is one control over cash disbursements. But that control also ensures that expenses and purchases are authorized and approved, so the benefit of applying it is pervasive throughout the business.
Businesses of any size should have written policies for ensuring that cash is disbursed only when authorized. Review your policies and procedures periodically and, when necessary, revise them to correct any identified weaknesses or inconsistencies. Establish a process for diagnosing how prepared your company is to prevent fraud, and follow up promptly on identified deficiencies in controls.
Improve collection processes: One of the keys to controlling accounts-receivable balances is having very clear payment terms and following up with aggressive action if they are missed. Frequent phone calls, emails or visits can achieve two objectives: offering unexpected customer service (“Is everything all right with the order?”) and communicating a collections subtext (“Our accounts-receivable department tells me that your payment is still outstanding — is there a problem?”) It may help to offer some customers a discount for prompt payment—but a better solution might be to get compliance with the original (and already agreed upon) payment terms.
You also need to demonstrate to customers and your staff that late payments are not acceptable. Overdue accounts should be highlighted in management reports (along with proposed actions), and accounts-receivable statistics (such as days sales outstanding) can be reported and tracked as well.
Manage accounts payable: Your accounts-payable strategy will depend upon your relationships with suppliers, your relative negotiating power, whether there is a need to conserve or maximize cash and conventions in your industry. It is normal to aim to pay suppliers in accordance with their payment terms or slightly later. On the other hand, if your business has a cash surplus, given the low interest rates that are currently earned on excess cash, there may be merit in paying promptly to maintain a good reputation.
Businesses that are able to pay early can take advantage of their position to negotiate discounts. Even a 1% discount for paying in five days instead of 30 represents a rate of return well above what you could otherwise earn on idle funds.
Review expenses regularly: Your budget is the best starting point for monitoring and controlling expenses throughout the year. The budget should include both a detailed list of planned expenditures and the entire plan for achieving your company’s objectives in the year. It constitutes an important element of the control system, provided that the budget-setting process is adequate and that you monitor actual expenditures compared to your budget, analyzing the differences.
Review your company’s expenses periodically in areas such as shipping and freight, mail and courier, insurance, rent and utilities, and consider where processes can be improved and costs reduced.
Work with your banker: Plan to meet with your banking team at least once a year. Face-to-face meetings will help maintain a strong working relationship and provide a good opportunity for you and your staff to get together with bank staff with whom you usually communicate only by email or telephone throughout the year.
This meeting should also be a forum for considering whether you have the right services in view of changes that have happened in your business as well as new bank services available. As the banks change their offerings frequently, it is important to routinely review which services you access and to assess whether new products may provide better or cheaper functionality.
Optimize your inventory cycle: Carrying inventory costs money, so try to optimize the cycle. An important element of optimizing your inventory cycle involves identifying where inventory levels may be reduced without impairing your firm’s customer service or production efficiency. For example, if you find that the slow-moving items are sold to unprofitable customers, the next step is to perform a more complete analysis to consider eliminating not just those inventory items but also the unprofitable customers.
Keep in mind that lower inventory levels and faster inventory turnover can produce ancillary benefits such as reductions in waste, obsolescence, theft and insurance costs. However, manage your inventory cycle with the other demands of your business in mind. For instance, if carrying a wide range of inventory has strategic value, then you’ll need to find other ways to make the process more cost-effective.
Take a team approach: Above all, effective cash management requires a team approach: your leadership, combined with input and follow-through from your managers and staff, as well as specialized guidance from your banker, chartered accountant or other business advisory specialists. The bottom line: better cash management means a better business.
Adapted from the Cash Management Toolkit for Small & Medium Businesses, by Jeffrey D. Sherman, MBA, CA. Published by the Canadian Institute of Chartered Accountants.