Cash Flow Management

Managing cash must take an equal stature with Net Income. In financial management, "cash is king" is a frequent motto. Your first step in managing cash is to elevate the importance of cash. The basic process for managing cash is straightforward. Try to maintain an adequate level of cash to meet current obligations and invest idle cash into earning assets. Earning assets must have high liquidity; i.e. you must be able to convert investments back into cash quickly. Additionally, you want to protect your cash balance by paying obligations only as they come due.

Managing cash also involves aggressive conversion of current assets into cash. Inventory levels must be converted into accounts receivables and accounts receivables must be converted into cash. Ratios should be used to monitor the conversion of cash, such as number of days in inventory and number of days in receivables. Cash balances are the result from a combination of cycles: inventory, purchasing, receivables, payables, etc. The key is to properly manage these cycles for conversion into cash.

Once conversion cycles are identified, cash forecasts can be prepared for managing cash. Weekly cash reports are used to monitor balances. Since everything ultimately passes through your cash account, a strong internal control system is required. This involves the separation of duties in handling cash, reconciling cash accounts, adequate support for cash disbursements, and other control procedures. The overall objective is to protect cash just like any other asset through a system of internal controls.

matt evans photo Written by: Matt H. Evans, CPA, CMA, CFM | Email: | Phone: 1-877-807-8756

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