Four cash management tips for your business

By Thomas Cha, SVP, Business Banking

Strategies for managing your business’ cash flow.

Most small and medium-sized business owners have heard the phrase “cash is king.” But what does it actually mean, and how does it apply to their business?

Although the majority of business owners know that cash flow is one of the most critical components for success, managing it can be a challenge. Managing cash inflows and outflows is key because cash on hand is what you need to keep your business running successfully. Here are four tips to help you with your business’ cash management.

1. Build a cash flow forecast. One way to practice sound cash management is to have a clear picture of your business financials. It is extremely important for business owners to understand basic bookkeeping, which can help them apply sound financial principles to all their decisions. There are several types of cash flow forecasting software, and some companies even provide free trials of their software so business owners can determine if it is the right fit for them.

Another strategy to consider – particularly if yours is a seasonal or cyclical business – is to open a money market account to build up a small nest egg of working funds. Your business banker can discuss setting aside small sums each month to help your business earn a return on your excess cash.

Additionally, a line of credit can be a helpful option for times when your business is experiencing a cash crunch. For this option, having a good banking partner is key, as your banker can provide guidance about the bank’s underwriting standards and position you for approval. More importantly, business owners need a dedicated business banker that understands their business and can consult on all of their cash flow and financing needs.

2. Monitor your large customers carefully. Small business owners run into problems when they have no equity. For example, one business owner wanted to make some capital expenditures, but his largest customer was 270 days past due with more than $100,000 in payables. After doing some investigation, the business owner discovered his largest customer had recently built himself a new house using this trade credit as a short term loan. As a result, the business owner was unable to make the capital expenditure he needed to keep his plant running. Such situations highlight the need for business owners to keep track of their largest customers’ payments. Send past due notices to the customers who are late in paying, and if customers are chronically late, they should be cut off from receiving goods and services.

3. Keep personal and business money separate. When a business experiences a cash flow problem, it is tempting for the business owner to mix personal and business finances. It is unwise to try to solve your cash management problem with this strategy. Never borrow from your personal money by putting it in your business checking. Instead, speak with your business banker to determine what solutions are available to help solve the cash flow problem.

4. Pay attention to your equipment. If you can possibly repair your equipment you will save money. This is why it is important to have a regular maintenance program with relatively fixed costs. Whenever possible use reconditioned replacement parts from third-party suppliers. Try to build a relationship using a local facility to handle the jobs.

A second alternative is to purchase used equipment that is in good condition. The best way to find this equipment is to look for companies selling the equipment you need.  Additionally, whenever possible, attend equipment auctions in your area, as these can be an additional source of inexpensive equipment.