An Introduction to Family Business Cash Management
If your family business is like many others, its total value is in many different business components. Inventory may be one. Accounts receivable is another. But actual liquid cash is yet another – and it’s something that is all too often in short supply, even for profitable businesses.
That’s because cash flow and profit are not the same thing. Turning a profit just means your revenues exceed your expenses. It doesn’t mean you have the cash you need for daily operating expenses or emergencies. In accrual accounting, a credit sale is recognized immediately on your income statement, even if the actual payment is still a long time in coming. It’s on your statement of cash flows that you show when a payment for a credit transaction is received. So even if your business is profitable, you can still have a shortage of cash – and this can be especially true for smaller, family-owned businesses.
Here is where cash management comes in. When we think of cash management, we’re talking about orchestrating the timing of cash inflow from customers and lenders so that it gives you the cash you need to meet your financial obligations in the form of cash outflows – expenses from payroll, lenders, and suppliers. When done right, cash management helps you have enough cash on hand.
To manage your cash flow effectively, you must closely examine and become familiar with your family business’s cash needs, including when and how those needs typically occur. Conduct a thorough audit of your family business accounts receivables and payables. Doing this can help you identify opportunities to improve cash flow. For example, you may establish new billing and collections practices, or policies regarding the payment of supplier invoices, to help you maintain control of your cash as long as possible.
Maintaining adequate liquidity ensures that your family business is able to meet its short-term financial obligations such as supplier invoices and other accounts payable. Learn how to measure your family business’s liquidity and financial health at Defining Key Financial Ratios, Financial Ratio Worksheets, and Profit-and-Loss Projection at Inc.com. In addition to building an emergency fund, you also need to find ways of accessing additional cash as needed. This includes forming strong relationships with your bank.
Even in difficult financial times family businesses can survive with careful cash management strategies that balance expenses and income. Refinancing high interest debt to lower payments and asking for longer terms can help reduce cash requirements. Requiring your customers to adhere to shorter terms can further compensate. Articles at Inc.com further discusses strategies on how to preserve business relationships through a financial crisis at When a Cash Crisis Strikes and how to survive the ups and downs of the economy by keeping an eye on business finances at Riding the Economic Roller Coaster, Inc.com.
For more information on cash management, please see our article on Developing Cash Management Practices for Family-Owned Business. At Inc.com, The Art of Cash Management, an examination of how good cash-management practices can influence your business’s growth; and The 10 Absolutely Must-Follow Cash Flow Rules, for tips on how to maximize liquidity.
Contributing sources:bizfinance.about.com, smallbusiness.findlaw.com, http://www.inc.com/guides/start_biz/20675.html