Cash is at the centre of all your business activities. You need cash to buy inputs such as electricity and office supplies, you need cash to expand the operations, you need cash to run the day-to-day business and you need to generate revenue (cash) from the business's operations to make these purchases. The business is successful if the cash it generates is greater than the cash it consumes. The more effective that cash is managed, the more successful will be the operations. The more successful the operations, the higher the standard of living and quality of life for the business operator(s) and their family.
Effective cash management can help your operations in the following ways:
• Measuring and monitoring. You cannot manage what you do not measure. Proper cash management provides you with information you need to help measure and monitor the degree of success of your goals and objections. If the financial gain or financial cost of each activity in the business is not known, there is no way of knowing whether that activity is being performed in the most efficient manner.
• Provides the business owner with the necessary resources to effectively manage the business assets. If the funds are not available when and how they are needed, the odds are inefficiencies in the business operations will develop and continue to be a part of the day-to-day operations.
• Allows you to achieve cost savings. The minimizing of costs is just as important as the maximizing of revenue. You will not succeed with runaway costs and cash management helps control costs. For example are there asset which are insured for 12 months of the year but are only used part of the year. Do you need full insurance coverage for the full year?
• Helps to anticipate possible future financial problems whether in the short, medium, or long term and to have a system in place to prevent any financial problems from materializing. In the short term you need cash management to ensure that you are able to have sufficient cash resources to see you through all twelve months of the year not just those months where there is an inflow of cash. The months when cash outflow is the greatest is not always the same months when cash inflow is the greatest. In the long term you have to plan for the lean years during the years of maximum cash inflows and not during the lean years themselves.
• Ensures that all times the business operates in an environment of financial stability. Financial stability brings with it the flexibility needed to adjust to changing economic environments. We are all so well aware of changing economic times and cash management helps to adjust to these changes.
The end result of cash management is the maximizing of financial results. Maximizing financial results helps you to reach your goals and dreams in such areas as succession, quality of life, and any other life goals you and your spouse have set for yourselves and your family. You do not need those sleepless nights and the calls from the banker. Also, would it not be wonderful to have an operation which the kids would like to take over or you are able to sell and retire with sufficient funds.
– Bruce Martin, C.A.