Strategy for Managing Cash

managing cash

Does your company have a strategy for managing cash?  Many companies have established procedures for purchasing materials, collecting customer payments, and paying vendors. But often people either do not communicate these procedures or simply don’t follow them consistently. Even when everyone is aware of and follows the established protocol, your system may be flawed. Before we show an example, you need to know how to manage cash flow

Know How to Manage Cash Flow

We all know that cash is king – liquidity is essential for survival. Many entrepreneurs only know how much is in the bank, but they don’t understand how much cash they actually have. So, how does one manage cash flow? First, you need tools. Here are a few tools that can help a company manage cash flow:


Download eBook 28 Ways to Improve Your Business's Cash Flow


Manage and Work Your Operating Cycle

Then you need to manage and work your operating cycle. Your operating cycle is “how many days it takes to turn purchases of inventory into cash receipts from its eventual sale”. It indicates true liquidity – how quickly you can turn your assets into cash. Calculate how long your operating cycle is using the following formula:

Operating cycle = DIO + DSO – DPO

Watch Your Expenses

Watch your expenses carefully. If you do not have an eye on SG&A and procedures on what can be purchased, then you risk racking up unnecessary overhead. Think about too much inventory, unnecessary equipment replacements, extreme marketing budgets, etc. 

Use Cash Wisely

Use your cash wisely. Always be thinking about will this add value to my company? when spending your valuable cash. If you will not see a return on your investment, then consider spending the cash elsewhere. 

Collect Quicker

Another method to manage (and improve) cash flow is to collect quicker. This is a great method to use if you are in a cash crunch and can only make small improvements. For example, there is a $10 million company that collected their accounts receivable every 365 days. They had a lot of cash tied up. If they improved their DSO 5 days, that would be an extra $137,000 of free cash flow

Example of Strategy for Managing Cash

Let’s look at an example of a strategy for managing cash flow. Imagine that Company A has 120 days of inventory on hand. They collect receivables in 60 days. And they pay payables within 30 days.  Even assuming that this is their established cash management strategy and everyone follows it, Company A will still find itself in a cash crunch. This is because of the disparity of time that cash is tied up in inventory and receivables versus the speed with which it pays its payables.

So what can Company A do to free up cash?  Here’s a link to an article that talks about how to develop a strategy for managing cash and techniques to improve cash flow.

Strategy for Managing Cash, How to Manage Cash Flow


Originally posted by Lisa Knight on February 19, 2015. 

Strategy for Managing Cash, How to Manage Cash Flow

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