The importance of cash management

What is cash?

Cash is ready money in the bank or in your business. It doesn't include inventory, accounts recievable or property. They may turn into cash at some point, but you need cash on hand to pay your suppliers, lease and meet your payroll. Profit growth doesn't always mean more cash.

Profit is the amount of money you expect to make if all your customers paid on time every month and if your expenses were spread out evenly throughout the year. However, cash is what keeps your business running while you are busy trying to make a profit.

It's important to organize your finances around a positive cash flow to keep your business running. Some of the components of your cash flow are:

• Operating cash flow
  This is often called your working capital, the cash flow generated from internal operations. It is the funds generated from sales of your product or service and it is your lifeblood. Because this is generated internally, it is under your control.
  
  
• Investing cash flow
  Investing cash flow is generated internally from non-operating activities such as investments in equipment or other fixed assets, nonrecurring gains or losses or from uses of cash outside normal operations.
  
  
• Financing cash flow
  This is the cash that comes into and from external sources such as lenders, investors and shareholders. A new loan, the repayment of a loan, the issuance of stock and the payment of a dividend are some of the activities that would be included in this section of your cash flow statement.
  
  

The starting point for avoiding a cash crisis is to develop a cash flow projection that looks at your business short-term and long-term so you can develop a strategy to fit your needs. To find help on preparing a cash flow statement or projections, contact one of our business consulting experts.