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Cash management 101: Controlling & forecasting cash flows

December 21, 2017
Read Time: 0 min

By Rich Greene, CEO – Director, Clarus Advisors

Cash Management by definition is the process of maximizing cash flow and minimizing unproductive cash balances. Speedier collection of receivables and diligent disbursement of trade payables definitively creates more free cash for the company. However, without understanding the cash and liquidity requirements of the company, the true potential of the cash is lost.

All too often in my consulting practice, I see businesses that do a great job managing their AR and AP days but keep significant cash balances in the bank. And at the same time, they are fully drawing on their lines of credit because they do not have a handle on their real cash needs. This inefficient use of cash creates a drag on earnings and can potentially impact customer/vendor relations as well as increase financing costs. There are three simple steps your clients can take to improve their understanding of their cash flows. Following these steps will allow your clients to better allocate cash so as to create a greater value for their company.

1. Cash Planning and Forecasting

While not an exact science, cash planning and forecasting will give your clients a clear grasp of their cash needs. Intuitively, we understand that the greater the velocity of cash through the business cycle (the time required to convert goods and services to cash), the less cash required to finance business operations. We can also grasp that any increases in cash can be used to expand the business at its lowest cost. However, forecasting is one of the biggest challenges for any business, especially a small one.

Assist your clients by helping them understand their true cash needs for meeting their current operational costs and for reaching their desired growth. Help them use previous and current data based on their AR, AP and inventory turns to determine present and future cash needs. In addition, the use of benchmarking tools (such as ProfitCents) will help the financial team keep forecasts realistic and help to determine the most cost-efficient way to provide them. A benefit of tools like ProfitCents is that they can provide a framework of talking points for discussing with company leadership.

2. Real-Time Data and Review

Cash planning and forecasting are great tools, but if they are only part of a tactical or strategic plan that sits on goes unused, then the exercise is futile. Coach your clients to review actuals against forecasts. A daily review by the financial team should encompass real-time data from their bank(s) such as loan balances and cash balances. It should also include a detailed review of AR and AP Outstanding, along with inventory levels versus projected sales. Help create a simple one-page report for the owners to help them visualize their current and projected cash positions that can be presented weekly.

3. Taking Action

The appropriate level of cash and liquidity will vary greatly by industry. Planning, forecasting and monitoring liquidity levels will help your client better manage their cash. This will give them a better understanding of the impacts and costs of asynchronous cash receipts and disbursements as well as the cost of both short and excess balances.

Making cash reporting a part of the weekly leadership team meeting will give their management a greater understanding of the opportunities and constraints they are facing as they run their business. It also gives the financial team immediate feedback regarding current and future activities that will impact their mission to safe guarding the company’s cash flows.

Additional Resources

BookBuilding Value: The 5 Keys for Achieving Success

Webinar: De-mystifying the Cash Flow Discussion

Article: Cash flow analysis: Providing value to business owners

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About the Author


Raleigh, N.C.-based Sageworks, a leading provider of lending, credit risk, and portfolio risk software that enables banks and credit unions to efficiently grow and improve the borrower experience, was founded in 1998. Using its platform, Sageworks analyzed over 11.5 million loans, aggregated the corresponding loan data, and created the largest

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