Cash is not a Dirty Word: 4 Keys to Better Cash Management

Here is a four-letter word: CASH.

While no one claims cash is a dirty word, the way many businesses approach cash management, one would think it was a dirty concept.

Let’s get the sensitivities out of the way. You are in business to make money. Period. If you do not have a plan to make money you are not in business, you are pursuing a hobby or involved in philanthropy.  Irrespective of whether you are a non-profit or doing it for the love of endeavor, if you are not making money you won’t be around long enough to continue the benevolent thing you’re doing or enjoyment that you are getting from the business. The leading cause of business failure is running out of money.

Now, let’s clarify. By money, I don’t mean profits. Yes, you absolutely need to be profitable. But by money, I mean moolah, loot, dinero, cold hard cash. Cash is the physical manifestation of profits, and you must collect it to continue your business. Because I am sure your vendors don’t supply you based on promises.

If your business sells on any type of credit basis or you send an invoice and wait too long for payment, you may have a cash-is-a-dirty word problem. If a good chunk of the company’s money is in accounts receivable (‘A/R’), you may have a dirty word problem. Simply recognizing that you have A/R and looking at A/R aging monthly is not cash management.

Here are 4 steps to being more proactive in your cash management:

1. Recognize there are actually 13 – four-week periods in a year. If your business is recurring billings, consider the possibility of billing in four-week increments instead of monthly. While the total yearly contract value may be the same, the frequency of receiving money is naturally higher, 13 times a year vs. only 12 times a year.
2. Don’t let A/R age beyond your sales terms — whether it is 15 days or 30 days payable. Period. Aged A/R is letting your customers use your money for free. Contact customers on a regular basis starting a week after an invoice is sent to ensure invoices have been received (#1 excuse why invoices are not paid timely) and there are no issues with getting paid within terms. This is especially important with new clients until you have established trust that they pay regularly. You not only have to regularly review aging reports, you must have a process for collecting what’s due your company. Hoping and wishing is not a process.
3. If your business requires contract retainage, make yourself aware of retainage requirements as it relates to your state laws. I have seen mismanagement of retainage as a significant cash drain on many businesses in the construction business. In several cases it is the reason the business is no longer in business.
4. Explore the possibility of getting upfront deposits, especially for any special order or when dealing with new customers.

Some business owners will offer up a variety of excuses why the above won’t work for their business.  They haven’t tested whether these ideas will work, but dismiss them out of hand. Remember that money not collected not only hurts the business, it may be the reason the business does not survive.