Smart Cash Management Gives You Optimal Choices
From RBC Bank
RALEIGH, N.C. – June 2, 2010 – Whether you’ve been in business for one year or 10, you know that having enough cash to fund current operations and to invest in the future can be challenging. But, optimizing cash flow is absolutely doable. Here are a few tips and reminders about ways to make that goal a reality. But first, a review of what cash is – and isn’t.
It is not:
There are three basic steps that most successful businesses take to make sure that they are attuned to the cash status of their business:
STEP 1: Assess your financials (balance sheet/statement of cash flow/income statement), to understand your current financial situation.
The balance sheet, statement of cash flows and income statements form the fundamental picture of your business’ financial health.
Getting a handle on accounts receivable, inventory status and current debt is the first part of the assessment process and provides the essential balance sheet information.
Having a statement of cash flows is important because it reflects how you get cash and where you spend it (financing, investing and operations.) This document tells you how much you are borrowing and how much you are paying investors, for example. Sometimes negative cash flows are good (for example, using proceeds from a big sale to pay off long-term debt). And sometimes positive cash flows are not good (a company losing sales might borrow money via a structured loan; while the resulting cash flow is positive, this move creates challenges for paying future obligations.)
Last, in assessing financials, it is important to understand that income statements can sometimes be misleading because they do not reflect actual cash on hand. On income statements, revenue is booked when you make a sale, not when you receive payment; expenses are booked when you incur them, not when you pay the bill.
STEP 2: Operate effectively to improve your cash position.
Once you have a sense of the financial picture, one way to improve it is by reducing the amount of cash going out the door. Keeping daily expenses in check, keeping inventory as low as possible and speeding up collections are three very important ways to improve operating effectiveness. While these sound like common sense recommendations (and they are), something as basic as quickening the pace of receiving payments can have a positive effect on your financial statements and your cash position. Two tools to consider in achieving this goal:
STEP 3: Manage growth for profitable and timely return on investment.
Unsteady growth can cause big fluctuations in cash flow. But sound, steady growth – whether by adding staff, adding space or adding a new subsidiary likely will fuel future attractive growth opportunities.
When considering a growth opportunity, look first at your strategy and your cash. Then align the investment with the type of growth that fits it best. For example, hire permanent staff to fill long-term needs, but engage short-term, contract staff to fill short-term needs.
Once a business has a handle on these day-to-day basics of cash management, it’s time to look ahead and anticipate when, where and how your cash needs likely will occur in the future.
With growth often comes a need for cash management tools available from banks to help you simplify the increasingly complex tasks of assessment, operational effectiveness and growth strategies for your business. Examples of these tools include: lines of credit, overdraft protection, lock-box services, electronic bill payment and presentation, sweep accounts, merchant services, payroll services, tax-payment services, SBA loans and online banking.
No matter where you are in your business cycle, it is important to have a good understanding of your present cash status and the tools available to help you achieve success in the future.
This article is provided by RBC Bank. The information included in this article is not intended to be used as the primary basis for making financial decisions. RBC Bank does not provide tax or legal advice. Please consult your own financial, tax or legal advisor.
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