Effectively managing inflows and outflows of money is a critical part to the success of any business. We have many discussions with all types of clients regarding the process of effective cash management. The classic question for all businesses, regardless of their size is: how can they bridge the timing difference between receivables and payables effectively, all while improving efficiencies in operations and reducing costs? The answer lies in an effective and well thought out cash management plan for the business.

What exactly is cash management? Simply put, it is the process of managing revenues and expenditures that flow into and out of a business. Financial managers employ a variety of cash management techniques to minimize loans from outside sources and to ensure that there is sufficient cash on hand to meet obligations. Good cash management improves a company’s profitability by shortening the collection timeline (thus increasing available cash), reducing operational costs, and slowing disbursements of cash. In general, business cash management is concerned with maximizing cash flow, maintaining a cash reserve, managing business lines of credit, and improving operational efficiency. Often, the decision of whether to lease or purchase assets is considered as well.

There are three main things to keep in mind when it comes to efficient cash management for your business:

• Inventory Turnover - Turn over inventory as quickly as possible while avoiding drastic depletions of stock that might result in a loss of sales. Efficient inventory production management involves shortening the production cycle and increasing raw materials turnover.

• Collection of Accounts Receivable - You should collect your accounts receivable as quickly as possible without losing future sales because of high-pressure collection techniques. Accounts receivable, like inventory, tie up cash that could otherwise be used to reduce outside financing or be invested in earning assets. Cash discounts for timely payment should be considered as one technique. Also, think about wire-transfer payments to speed up receipt of payment.

• Payments of Accounts Payable - You should pay your accounts payable as late as possible (without damaging your or your business’s credit rating), but take advantage of any favorable cash discounts for paying on time. Negotiate for favorable credit terms.

Financial institutions have invested extensive resources in technology that allow business clients to “speed up” the collection of receivables (inflows) and match that up with the “slowing” of payments to vendors/suppliers (outflows), thus bridging that timing difference, increasing the efficiency of operations and ultimately saving the business money. What are some of these solutions?

• Lines of Credit - These are extremely helpful to bridge the “timing difference”. It is most often used by businesses with short-term or seasonal cash needs or with unpredictable cash flow.
• Online Banking - Businesses can view up-to-the-minute account balances and transactions, so reconciliation can be done daily, not monthly. Funds can be moved from one account to another instantly with a simple click of a button, enabling funds to be in the account they need to be in, when they need to be. Basically any banking function can now be done online, and with laptops and smart phones anywhere you can access the internet. Electronic statements are also available, saving time and paper.
• Electronic Transmission of Funds - The ability to send money electronically and automatically, to individuals, businesses, vendors, suppliers, etc.; which eliminates the need and expense of checks and postage. This also enables you to pinpoint exactly when a vendor is paid, to take advantage of payment terms and discounts.
• Electronic Collection of Funds - Collect payments from customers/clients - the ability to know exactly when you will be paid, bridging the timing difference. Customers can be set up for reoccurring payments any time during the month, reducing collection expenses and challenges.
• Make Deposits Directly from your Business - Eliminate the need to go to the bank to make deposits. With a check scanning machine you can deposit checks directly from the office. A huge savings of employee time, travel expenses, and a huge increase of efficiencies within the office.
• Credit & Debit Card Acceptance - The ability to take a credit or debit card as a method of payment from clients and vendors, in person, over the phone, or online.
• Business Debit and Credit Cards - Make purchases of office supplies, gas, etc. with varying reward points, terms and repayment options. A great way to track expenditures in one location.

The really unique feature of all of these services, is the fact that the need for them transcends across all different business sizes and sectors. For example, proper cash management is critical to the vitality and bottom line of the small retail store on Main St., the mid-sized property management company, the large manufacturer and all businesses in-between.

Though, with all the great cash management services and new technologies available, it still comes down to people. Individuals that will help you set up these useful services, train and educate employees on their use, and be there for support when questions arise – that is the great differentiator of services. In addition, a support staff that is at the cutting edge of technology – as new and more efficient ways to manage money evolve in the future. Ultimately, it is the relationship between the bank and the business – partners in health and success of the business.

Let us know how we can assist you in managing your cash flows and making your business more efficient and profitable! Call our Cash Management Team leader Mike O’Donnell at (585) 419-0670 x50605.