The Importance of Cash and Cash Management

Management of cash is the primary concern of most entrepreneurs when they start a business. How will they ensure they collect funds in time to pay their bills? Cash management is also a key concern for most households. For example, I may know that I make enough money to pay all my bills, but if the timing of when the cash hits my bank versus when my bills are due isn't in sync, I run the risk of penalties or worse.

Managing Disbursements

How a company manages various disbursements and current assets can have a significant impact on its cash flows.



Learning Objective

  • Identify different strategies for managing a company's disbursements

Key Points

  • One obvious trend in payroll management is to implement a flexible work force since the flow of work fluctuates.
  • Purchasing practices, such as renting as opposed to buying or buying out of season, can help a company maintain and generate cash flow.
  • Inventories have several hidden costs that can drain cash flow, including storage, insurance, spoilage, handling, taxes, and financing.
  • A company should make sure it does not over insure the business.

Key Terms

  • outsourcing: The transfer of a business function to an external service provider.

Managing Cash Disbursements


Cash Disbursements Cash payments are vitally important to manage in order to maintain a successful business.

How a company manages various disbursements and current assets can have a significant impact on its cash flows. There are several problem areas to watch out for, such as payroll, purchasing, inventories, and insurance.


Payroll

Payroll is a hefty cash outflow and requires special attention. One obvious trend in payroll management is to implement a flexible work force, since the flow of work fluctuates. Outsourcing and temporary workers are often part of a flexible workforce. However, a company must retain a full-time workforce for core activities. A firm can also increase payroll float times by simply distributing payroll checks after the point when banks will clear checks.


Purchasing

Flexible purchasing practices can help a company maintain and generate cash flow. A company may consider renting certain items as opposed to purchasing. A manager may ask, do we really need this item, and how often will we use it? If practical, a firm can order items out of season when prices are low. Finally, a firm may consider using credit cards to make purchases since this will allow more time for making payment.


Inventory

Inventories have several hidden costs that can drain cash flow. These costs include storage, insurance, spoilage, handling, taxes, and financing. A company should get rid of inventory that is not moving. Obsolete inventory should be removed immediately. A firm may also find new ways of disposing of inventory. For example, it is better to sell inventory at costs than not at all. The overall objective is to maintain inventory levels at a profitable level.


Insurance

A company should make sure it does not over insure the business. A firm should purchase insurance in group packages to obtain the lowest premiums. It should start by covering the largest risks first. It should then structure as high a deductible as is affordable. A company should avoid duplication and excessive insurance and shift certain costs, such as health insurance, to the employee through higher payroll deductions. Insurance should be used to cover risks that are material but occur infrequently.