Having enough cash to pay employees and other current expenses
is an ongoing concern of the financial manager. While sales and manufacturing costs can be regularly and
evenly distributed over time in an accrual based accounting system, cash payment for such services and
goods provided can be irregularly and unevenly received and actual expenses such as unplanned taxes or
casualty losses can arise. As such, substantial cash shortfalls can occur and may require unplanned and
costly trips to the bank for loans that need to be negotiated quickly.
Additionally, dollars can be wasted by being too conservative
and having too much cash on hand. Major corporations who receive millions each day, and pay bills and
payrolls in the millions each day have money market units which manage the incoming and outgoing cash
as a profit center. In other words, these money market units invest cash they are holding in those short
term markets which represent little or minimal risk, such as governments, other major corporations, or
major banks which will accept dollars for as short a period as one day ,or which short term securities
can be traded by the day with minimal transaction cost. These companies also trade in this money market
as borrowers of short term capital from the same daily markets and sources.
The whole idea of cash management is to maximize the earnings
of idle cash with minimal risk, and minimize the cost of short term borrowing. Its a daily worldwide market
in the trillions of dollars involving all major corporations, the major banks, and governments throughout
However, for the small corporation or firm, or the individual
entrepreneur, such minimal cost, minimal risk, sources and uses of funds are not available, even though
the problem of cash management is relatively as important. For these business units the key to optimizing
cash management is to have a cash plan and budget and understand some of the important tools and facilities
that are available.
Having a plan for the small business means tracking the historical
relationship between sales and the flow of cash. For example, consider what percentage of sales consists
of cash today and what percentage is to be received 30 and 60 days later. If an entrepreneur looks at
expenditures of the last several years it should be possible to make an accurate and timely forecast of
cash outflows as well. Once an accurate forecast of cash flows is possible then a line of credit from
the local bank can be negotiated well in advance of the need for such resources, and arrangements can
be made, well in advance, to invest excess cash. The goal is to take advantage of existing markets for
money by minimizing dollars sitting in the business and earning nothing and, on the other side, being
able to negotiate for needed cash at the lowest possible price.
Financial thinkers have developed formulas for the small
business manager to facilitate the thinking around this important business problem, and local banks also
provide advice. But the small entrepreneur is encouraged, above all, to have a cash operating plan and
a budget well in advance of the next fiscal year.