Cash Management Is Critical - “Cash is King”

Whether your business is an early stage start-up, currently in growth mode, or mature and running on tight margins, the way you manage your cash can make or break your company. So goes the famous saying, “Cash is King!”.

Managing the company’s cash and treasury function is very important to the finance management staff. The last thing the finance group wants to do is to be short on cash right when payroll hits. Even if your company is doing well with its cash balance, if you do not properly manage it, you could get caught with low balances in important accounts. In addition, are you managing the surplus cash of the business in order to earn the best return on those funds?

In this article, we will discuss the primary guidelines to follow to best manage your company’s cash flow and we will also explain how to use our Daily Cash Management Tool which can be found in our Worksheet Solutions page.

One of the most value-added and critical procedures I have brought to the many companies I have consulted for is a proper tool to manage their short-term (literally day to day) cash management. I have seen so many companies that just expect to have cash on hand when payroll hits only to find they did not have sufficient funds available due to a cash timing issue such as a large vendor check run or a delayed customer receipt. That, or they did not forecast that rent was due two days before payroll was hitting.

I understand that a “day to day” cash management process may sound like a lot of work but it is actually not that much effort once you have the model in place and are keeping it updated via basic banking downloads. It is the responsibility of the treasury or finance manager to understand the major cash inflows and their timing each month in order to cover expenses such as rent, payroll and insurance. We will discuss the major inflows and outflows of cash for a typical company and how to use our Daily Cash Management Tool to help keep your company on track and able to plan for these items.

Critical components of cash flow:

  • Common Receipts:

    • Customer or payer deposits

    • Merchant (credit card point of sale) receipts

    • Scheduled progress billing receipts

  • Common Disbursements:

    • Payroll funding

    • Vendor check runs

    • Rent

    • Medical Benefits

    • Loan payments

    • Credit card paydown

Estimating your receipts and expected deposits:

There are many types of receipts as well as timing for these receipts that your company may have. Our daily cash management tool allows you to fill in an estimated daily projection based on your companies latest experience. We always recommend that you are conservative in these daily averages so that you are not caught in a low cash position unexpectedly.

Our cash model contains sample data so you can see how the model interacts to provide ending cash estimates that you can customize to your company. For instance, many companies may not have consistent daily deposits or deposit activity as they may have large payers that pay at a specific time each month or deposits may be swept from various locations or subsidiaries periodically throughout the week or month. Try to enter these as best you can in the model and as you use it, you can refine these expectations as you move forward. Again, always be conservative with deposit projections.

Estimating your cash disbursement needs:

Payroll - Let’s start with perhaps the most important cash use. Your staff members are your most important asset. Missing a payroll due to a bad cash forecast is a nightmare, undermines confidence from your staff and is a major headache to rectify. A missed payroll can lead to emergency check runs, many emails and communications and having to rebuild trust with the staff. Most payroll cycles are every other week on the same day or twice per month at the beginning and middle of the month. Make sure you have these payroll estimates entered in the model on the day they are funded (usually up to two days before payday) rather than right on the payday. Your funds must be available when the payroll is pulled from your account. Again, it is recommended to be conservative and always forecast a bit more (10% even) than your normal payroll to make sure you are not short. If you know of any extraordinary needs such as a large bonus or vacation payment that is known to be scheduled.

Vendor Check Runs - We recommend that companies do only one major weekly vendor check run each week or two in order to limit the amount of interruptions to the staff. Please refer to our proposed vendor check run policies that you can find in the Vendor & AP category of our policy & procedure template products. Make sure you estimate a conservative amount for these check runs and enter them into your model where indicated. Rent check runs are typically the largest ones and they are usually at the end of the month to pay the upcoming month’s rent.

Medical Benefit Payments - Another critical disbursement is for any company paid group medical plans for your staff members. These payments are typically required each month and the medical insurance providers are very strict about missing these payments. Many of these insurers will cancel your coverage immediately if you miss the payment by even one day. You will then have the hassle of trying to get the program up and running again and possibly having an interruption of coverage for your employees. Make sure to have this payment scheduled on your daily cash forecast.

Loan Payments - If you have a loan agreement with a lender, it is critical that you pay on time or even a bit earlier to avoid any change of being late. You would not want to trip any covenants you have with your lenders. Make sure these are noted in your cash model.

Company Credit Card Programs - Another critical disbursement to estimate is your company credit card program payment due date along with a conservative estimate of the amount. Missing these payments can lead to your entire credit card plan being put on hold which could strand employees in the field that are depending on these cards to be active.

Other disbursements - The above list only includes the most common types of critical cash disbursements for a wide range of companies so make sure that you include any other disbursements that are unique to your company to make sure you have them scheduled in the model.

Using our cash management tool:

Our model is built out on a daily basis as that is the only way to properly manage your cash position. For example, payroll hits on a day not on a week. You need to have cash available prior to payroll funding of the specific day it is to hit. The model has a tab for each month with a line for each day and the tab then rolls onto the next month so that your cash forecast rolls-forward as you update each month.

We recommend that you update the “actual” cash results at least once per week so that the model is tying to you bank balance at least within one week back. The first column of the model can be used to note “Actual” vs. “Projected”.

As you use the model and update your daily cash deposits and disbursements you will be able to look forward to see if your company is projected to have the appropriate cash balance to support the upcoming requirements of payroll, rent, insurance, etc. that you input earlier. The model will report daily expected cash levels and you will be able to see upcoming needs and whether they will be covered at any given day.

We always recommend to have at least the next full month template completed for your company so that you can look forward to see what the next month looks like and start planning now for any issues. In many cases, I would update the next 90 days at the end of each month to have a rolling 90 day forecast each month.

Integration of banking reports:

All banks now provide some sort of online reporting that you can export and customize and/or summarize to help you to:

  • Update your daily cash model estimates

  • Tie out your current model to your bank balance

If needed, you can also base your cash forecast on your Book balance rather than bank balance but you will need to integrate to your GL bank register program rather than your bank reports and make sure that your GL bank register is fully accurate. We recommend tying this daily cash management tool to your bank rather than your GL as the bank is the true “cash position” you are working with and you can avoid any missing GL entries that may not be accurate to the bank.

Timing issues:

As noted above, when forecasting cash, always be aware of timing issues. For example, payrolls typically fund (pull from your account) at least 1-2 days before payday. ACH (epayments or receipts) can take at least 2 and sometimes up to 5 days to clear.

If you are using a vendor payable system such as Bill.com, those systems will typically pull the funds from your bank the very next day but then take up to a week to get your vendors paid.

Using our Daily Cash Management Forecast tool:

As you practice using our Daily Cash Management & Forecast Tool or if you build one of your own, you will continue to improve on the accuracy of your forecast. In addition to the daily cash management tool, we provide a summary weekly tool that is helpful in showing your 90 day projection of cash position. Once you have these models to the point that you are comfortable with them, you can start to use it to report to various audiences, such as:

  • Investors - as they need to know if they will need to invest more or less funds.

  • Board of Directors - as they are usually very interested in the cash position of the company.

  • Finance management - your CFO should be receiving this report at least weekly.

  • Leadership team - it is always good to have your leading managers aware of the company’s cash position so that they can best help to manage to make the most efficient use of the funds.

In conclusion, the cash management function of your company is clearly one of these most critical functions of your finance management team as it impacts so many parts of your business that it must be treated as a high priority. Once your company has put a sound cash management and forecast procedure in place, you will be able to have peace of mind as to where you stand on your cash position and be able to plan effectively for any challenges in the months ahead. This will allow you to address any challenges before they can become an emergency and threaten the company’s well being!