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WCM/U2 Topic 6 Cash Management: Basic Strategies, Techniques and Processes

Cash Management Strategy # 1. Cash Planning:

Cash planning is a technique to plan and control the use of cash. A projected cash flow statement may be prepared, based on the present business operations and anticipated future activities. The cash inflows from various sources may be anticipated and cash outflows will determine the possible uses of cash.

Cash Management Strategy # 2. Cash Forecasts and Budgeting:

A cash budget is the most important device for the control of receipts and payments of cash. A cash budget is an estimate of cash receipts and disbursements during a future period of time. It is an analysis of flow of cash in a business over a future, short or long period of time. It is a forecast of expected cash intake and outlay.

The short-term forecasts can be made with the help of cash flow projections. The finance manager will make estimates of likely receipts in the near future and the expected disbursements in that period. Though it is not possible to make exact forecasts even then estimates of cash flows will enable the planners to make arrangement for cash needs.

It may so happen that expected cash receipts may fall short or payments may exceed estimates. A financial manager should keep in mind the sources from where he will meet short-term needs. He should also plan for productive use of surplus cash for short periods.

The long-term cash forecasts are also essential for proper cash planning. These estimates may be for three, four, five or more years. Long-term forecasts indicate company’s future financial needs for working capital, capital projects, etc.

Both short-term and long-term cash forecasts may be made with the help of following methods:

(i) Receipts and disbursements method

(ii) Adjusted net income method.

(i) Receipts and Disbursements Method:

In this method the receipts and payments of cash are estimated. The cash receipts may be from cash sales, collections from debtors, sale of fixed assets, receipts of dividend or other incomes of all the items; it is difficult to forecast sales. The sales may be on cash as well as credit basis. Cash sales will bring receipts at the time of sale while credit sales will bring cash later on.

The collections from debtors (credit sales) will depend upon the credit policy of the firm. Any fluctuation in sales will disturb the receipts of cash. Payments may be made for cash purchases, to creditors for goods, purchase of fixed assets, for meeting operating expenses such as wage bill, rent, rates, taxes or other usual expenses, dividend to shareholders etc.

The receipts and disbursements are to be equaled over a short as well as long periods. Any shortfall in receipts will have to be met from banks or other sources. Similarly, surplus cash may be invested in risk free marketable securities.

It may be easy to make estimates for payments but cash receipts may not be accurately made. The payments are to be made by outsiders, so there may be some problem in finding out the exact receipts at a particular period. Because of uncertainty, the reliability of this method may be reduced.

(ii) Adjusted Net Income Method:

This method may also be known as sources and uses approach. It generally has three sections: sources of cash, uses of cash and adjusted cash balance. The adjusted net income method helps in projecting the company’s need for cash at some future date and to see whether the company will be able to generate sufficient cash.

If not, then it will have to decide about borrowing or issuing shares, etc. In preparing its statement the items like net income, depreciation, dividends, taxes, etc. can easily be determined from company’s annual operating budget.

The estimation of working capital movement becomes difficult because items like receivables and inventories are influenced by factors such as fluctuations in raw material costs, changing demand for company’s products and likely delays in collections. This method helps in keeping a control on working capital and anticipating financial requirements.

Techniques and Process

The success of a business often depends on how healthy its cash flow is and how well it’s managed. As a result, many wonder how to improve cash flow, ensuring they have enough incomings to balance with outgoings.

If you’re a new or growing business then this is especially important, as it’s likely you will have experienced lower levels of available working capital. Having plenty of working capital allows you to invest in greater resources, increase production and comfortably cover outgoings for a smooth cash flow.

Below are some of the best methods we’ve found to effectively manage your cash flow.

Keep track of it

First and foremost, you have to know the status of your cash flow in order to be able to manage it. This means keeping a close eye on every area of the business where money is involved, and regularly checking how much is being spent versus received.

Once you have a good idea of the business’s general cash flow health, you can begin to plan ways to improve it. If you find any problems, such as a few large expenses that mean more money is going out than coming in, then look for and apply a fix early on.

Cut out inefficiencies

You should locate any inefficiencies which are hampering your cash flow immediately, as even small ones can lead to big losses further down the line. This includes monitoring your overheads to see if you are spending unnecessary money on running the business, as well as having a clear picture of the overall state of your business.

It could also include selling assets which are outdated or no longer needed, as this can provide you with capital to finance more jobs or reinvest in the business.

Continue to invest in people and resources

Creating a smooth cash flow isn’t all about cutting back costs. It may sound counterproductive, but investing in your business by hiring new staff and equipment will eventually lead to greater profits and more money coming into the business.

This in turn will ease cash flow problems and make them far easier to manage, which is a great help when it comes to running a business.

Such investments can help build up an emergency fund for cash flow problems. This could prove to be a life saver and a worthy investment further down the line, as it will prevent cash running out – which would grind your business to a halt.

Speed up payments

One of the most effective cash flow management techniques is speeding up payments. This means encouraging the customer to part with their money before the end of the invoicing period.

It could include asking for an upfront payment before work has started or is completed, or offering incentives for early payment, such as a discount.

Use invoice financing

If you find cash flow challenges are affecting your short-term business finance, our invoice finance services can help smooth out your cash flow. Our cash flow solutions here at MarketInvoice make it quick and easy for your business to secure funding against your outstanding customer invoices.

Getting paid upfront means you’ll have access to more cash for helping with things like business operations, paying employees, investing in growth and more.

Managing your cash flow doesn’t need to be an overly complicated process, provided you have the systems in place to effectively control it.

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