• Mountain Top Bookkeeping

Why Cash Management is Important


Cash management is often called the “lifeblood” of a business, and for good reason. If you can’t pay your employees and you can’t pay your bills, you can’t continue as a going concern even if you have impressive sales on your records and are growing rapidly.


Many businesses, even the profitable ones, fail because they experience an unexpected cash crunch they cannot escape or recover from. Business school case studies are littered with stories of failed businesses that spent countless hours designing products and calculating profit forecasts but floundered and failed because they did not expend similar effort to generate cash flow statements and cash management forecasts.


Sales are not cash flow

Many business owners have a false sense that if sales are good and money should be coming in, then their business is healthy. But until that money is actually received, those sales can’t be used to pay the suppliers and overhead that keeps them in business.


And creditors like credit card companies or landlords don’t care what is expected to come in. They have their own cash flow needs, and they only care that there is enough in your “current balance” on the day your payment is due. If there isn’t, late fees accrue, credit ratings decline, and in the worst cases collection agencies start calling.


As a business owner, however, there is more to it than just knowing your “current balance” at any given time. To really be in control of your own destiny, you must organize both your accounts receivable and accounts payable in ways that will maintain that balance throughout the month, quarter, and year so that when bills must be paid, you have cash available.


Below are several considerations every business owner should review and consider to ensure reliable cash flow and prevent a surprise “cash crunch” that could trap them in a downward spiral of scrambling each week or each month to pay employees and creditors while maintaining your own services to your customers.


Commit to developing and maintaining cash flow forecasts

By developing cash flow forecasts based on historical data such as previous cash flow statements, inventory flows, sales, invoices, and payments, you can develop a good idea of what your “current balance” should be at any point in the current period.

Having this information can help with things such as:

  • How to space out your bill payments rather than paying everything at once

  • How to order inventory at proper intervals

  • How to spot problems before they develop – if cash is not flowing as expected, you can determine why and take action before it becomes a crisis

Implement careful inventory management

While all inventory is theoretically potential profit, too much of it at the wrong time can tie up cash and be a drag on the business. Be sure to:

  • Avoid ordering too much inventory at once (again, forecasting will help with this)

  • Don’t pay cash if you can help it. Instead use financing options, either from a line of credit or from suppliers themselves

  • Track inventory actively to see where cash might be tied up and could be used more effectively

  • Discount outdated inventory if necessary to free up cash on hand

Invoice your customers promptly – and be rigorous about collecting payments

Often business owners can be afraid of offending customers by pressing them for payment, but as we’ve seen interruptions to cash flow can doom your promising business, no matter how good your “paper” profits appear.

  • Collect deposits – or even payment in full - up front if that is common for your industry

  • Invoice immediately – if you don’t invoice for two weeks, and then your customer waits thirty days, that is unnecessarily delayed cash flow

  • Use an e-invoicing software, which customers will receive more quickly that physical mail. It will also allow you to easily track outstanding payments, when they are due, and when they are past due.

  • Keep track of due dates, and promptly notify customers of late payments.

  • Institute late fees to encourage customers to pay on time

  • If a customer is a consistent late payer, consider requiring payment on delivery

Make it easy – and desirable - as possible for customers to pay you on time

As simple as it sounds, be as proactive as possible about this. The easier and quicker it is for a customer to pay, the faster you are likely to get your cash.

  • Communicate with your customers and find out what their preferred method is for payment.

  • Accept credit cards, mobile payments, other forms of electronic payment that will make it easy and quick for them to pay, especially if you have contacted them as a reminder

  • If you are in a business that allows you to keep a credit card on file and charge it on the due date, take advantage of it.

  • Put the date due on the invoice rather than a time frame (e.g. “due April 23” tends to be more effective than “due in 30 days of receipt”)

  • Offer discounts for prompt payment – the benefits to your cash flow may outweigh any slight extra profit margin

Optimize your own accounts payable to maintain cash on hand

  • Give preference to vendors that offer flexible terms

  • Prioritize bills based on due date, and work with creditors to space out due dates so that you are not on the hook to pay everything on the same day

  • Reconcile daily so you know where you stand

Cash management can make or break a business, even if sales are great and growth seems assured. Sometimes it only takes one big surprise to put a business on the back foot and on a slippery slope to insolvency. But by taking simple, proactive steps like those listed above, you can prepare for the unexpected and ensure that you have cash on hand when you need it, or have options in place to help you through a rough patch.


If you're looking for help keeping your cash flow management practices up to date, Mountain Top Bookkeeping can help. We’ll provide you a team of bookkeepers with expertise in your industry. We work with your existing accounting software and tools, but can also help you make the move to newer technologies.

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