Cash Management Techniques for Small Businesses

[Caramelle]

Effective cash management is an important aspect of managing a business and ensuring the optimum growth of the business owners’ investment. It entails the proper management of a firm’s cash flows. If you are just starting out a business and operating on limited capital, there are simple cash management techniques that you can apply to maximize your cash balance.


Synchronize your cash flows

Synchronized cash flows involve forecasting and arranging your cash receipts and cash disbursements in such a way that the cash inflows will occur earlier than the cash outflows. By funding your disbursements with cash receipts, you will avoid using your bank balance to pay off expenses. This technique will allow the business to maintain a minimal bank balance.

Make use of the float

The bank cash balance and the book cash balance of a business often differ due to timing in the collection, processing, and clearing of checks. It takes a few days for a check to clear through the banking system and since this float can have an impact on both collection and disbursement, a business owner can take advantage of the float by managing the timing of both activities. Many businesses delay the disbursement clearing by releasing the check after banking hours on Friday.

Accelerate cash collections

While sales should preferably be in cash, many businesses offer credit sales to attract more customers. This can put pressure on the working capital of the company. Thus, it must implement strategies to collect debts on a timely basis. These may include prompt billing and regular follow-up, grant of incentives such as discounts for early payment, and the prompt deposit of the collected check.

Delay Disbursements

Slowing down the disbursements will help reduce the need to use the cash balance. Some of the techniques include centralizing payments so that they are well-timed and provided for, maintaining a Zero Balance Checking Account, maximizing credit terms, and reducing payroll frequency.

Reduce the need for precautionary balance

The need to maintain a higher bank account balance may be reduced by preparing a more accurate cash budget that provides a good balance between the cash inflows and outflows. Instead of allowing funds to sit idly in the bank in anticipation of disbursements, they can be invested in highly liquid securities that will earn some profit.​

 

[Mika]

Financial management is very important in a business, irrespective of its size. Big businesses have a different department for finance with a sizable team to look after the financial activities. This kind of separate department might not be possible for small businesses but the small business can at least have someone to look after the finances. Your small business also needs to do all transactions through banks instead of sending cash. When you do transactions through banks, it will be easier to see where you are spending money and how money is coming on. However, you have have petty cash for small payment.