Cash Budgets

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 the world.

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.

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