Five Potential Pitfalls of Cash Management

The old adage “cash is king” rings true as much today as it ever has in this fluid business climate.  However, as a business owner, you have a choice – manage your cash or it will manage you. It is crucial to regularly review cash balances and cash flow, most often even more so than the P&L. A P&L can show great year-over-year profit growth, but cash will tell the underlying truth about how sustainable a business really is. By being proactive, truly managing cash will relieve strain on the business and allow for future growth.

#1 Growth Requires Cash

Growth is one of the most common goals of businesses, but it is not without risk. And, it can require a lot of cash. Whatever you think you need in cash, it is likely you may need 50% or even 100% more. For a manufacturer or other B2B company, growth may mean bringing on larger customers, which can be a big boost to revenue. What is not always planned for, however, is the impact of these new customers on your cash conversion cycle. Most likely, that new customer will dictate the terms on which they pay you. That can quickly erode available cash to a business. International growth can have the same effect. Despite the increasing pace at which the world moves, conducting business internationally can mean increased lead time with suppliers and longer delivery times to customers, again stretching the cash conversion cycle.  

Maybe growth means an acquisition. Do you have the dry powder to get the deal you want? The days of aggressive bank financing are over, so any deal will require cash in some form or another. And with cash, if you play your cards right, you may just get that acquisition on sale.

What does growth mean in terms of your infrastructure? Do you need to hire more, purchase more equipment, and add office space? What is the cash impact of these changes?  

#2 Bank Financing – Ask Before You Need It

The worst time to seek bank financing is when you have no other options. Like any deal, you want to approach your bank from a position of strength. That removes risk for them and enables you to achieve much better terms. A good banker exists to help your business, but they can only do so by ensuring they are taking on a manageable risk. Banks love when customers can present them with a plan, and have the ability to look into the future of their business. Carefully evaluating the cash requirements for the business in the next 6, 12, 18 months or more enables you to ask for the right deal and likely ensure adequate liquidity to support that future.  

#3 Seasonality – Plan for the Ups and Downs

Many businesses are seasonal. However, most of those same businesses don’t treat their cash accordingly. Don’t get caught in the trap of celebrating a big month or quarter thinking the business has turned a new page and burn too much cash in the near term. If in retail and Q1 is traditionally slow, stock cash away even after that big holiday season. If the success continues, you will be left with too much cash. Is that really a bad thing?

#4 Reserve for Big Outflows

Depending on how predictable cash flow is, for many businesses, large outflows can cause major cash challenges. This can apply to once-a-year expenses, once-a-quarter expenses, capital expenditures, or even payroll weeks. To combat a cash crunch due to timing, you should reserve cash during normal periods or times of surplus. For example, for an annual expense like an insurance premium, reserve a monthly amount so by the time the renewal hits, the cash is available. For very fluid cash flow businesses, the same thing can be done for payroll, reserving amounts of cash in off-payroll weeks. Another best practice is to do check runs for AP in alternating weeks from payroll. For companies with borrowing base lines of credit, a big A/R collection can put you flush with cash, but it also means your borrowing capacity on your line likely dropped, and you may have to write a check back to the bank.

#5 You Get What You Pay For

The lowest cost option is rarely the best option. If buying equipment, have you planned for maintenance costs, which often increase with lower quality? On another front, the lowest cost options for commercial insurance may be a good fit for your business, but in all likelihood, it also means you are exposed to certain business risks. Insurance policies should be reviewed carefully in any situation, but if saving money on premiums, does that mean higher deductibles? Or even carve-outs in coverage altogether? If you removed flood damage coverage from your building policy to drop your premiums by $10,000 per year, that could leave you writing a big check should disaster strike. That may still be a good business decision, but plan for the potential risk and have a little extra cash on hand.

We Can Help

Cash is your most versatile asset. Don’t let cash management become a liability. Signature Analytics can help your business avoid potential pitfalls of cash management. We provide the ongoing accounting support and financial analysis necessary to more effectively run your company, analyze operations, and guide business decisions. Contact us today to learn more or set up a free consultation!