cash management represented by a money tree in a green meadow shedding US bills

Business Cash Management Explained

Featured image by Skylines

As a business owner, you know that cash is the lifeblood of your organization. Without a steady flow of cash, you won’t be able to pay your bills, invest in growth opportunities, or even keep the lights on. That’s why effective cash management is so crucial for the success of your business.

In this article, we take a deep dive into the world of cash management. We explore everything from understanding cash flow to managing accounts receivable and payable to inventory and financing options. By the end of this post, you’ll have a solid understanding of how to optimize your cash flow and keep your business running smoothly.

Understanding Cash Management and Cash Flow

Cash flow is the money that comes into your business and the money that goes out. It’s the net amount of cash available to your business at any given time. Positive cash flow means that you have more money coming in than going out. Meanwhile, negative cash flow means the opposite.

There are three types of cash flow:

  • Operating Cash Flow – This is what comes in and goes out as an effect of your business’s normal operations.
  • Investing Cash Flow – This is the circulating cash that is a result of investments you make in the business. Buying new equipment or expanding into a new market are examples of investing cash flow.
  • Financing Cash Flow – This is the cash that comes in and goes out as an outcome of borrowing money or issuing new shares of stock.

It’s important to track and manage all these forms of cash flow. Only then can you make informed decisions about how to allocate your resources.

To track this, you’ll need to create a cash flow statement. This is a document that shows the cash coming in and going out of your business over a specific period of time, such as a month or a year. Many accounting software programs will automatically generate this statement for you, but you can also create one manually.

Once you have your statement, you can start analyzing it to identify trends and patterns. For example, you may notice that you have a lot of money coming in during the summer but very little in the winter. This could indicate that you need to adjust your pricing or marketing strategy to better align with your customers’ buying habits.

Managing Accounts Receivable

This is what your customers owe your business for goods or services that you have provided but they have not yet paid for. It’s a recommended aspect of cash management because it directly affects your cash flow. The more money you can collect from your customers, the better your cash flow will be.

To improve your accounts receivable, you can:

  • Send invoices as soon as you provide goods or services. The quicker you send the invoice, the quicker you will get paid.
  • Follow up on past-due invoices. If you notice that a customer’s invoice is past due, reach out to them to inquire about the delay.
  • Offer incentives for early payment. For example, you could offer a discount for customers who pay their invoices within ten days of receiving them.

You should also reduce the risk of bad debt. This is money that customers owe you but are unlikely to pay. You can reduce this risk by following these tips:

  1. Check the creditworthiness of new customers before doing business with them.
  2. Require a deposit or advance payment before providing goods or services.
  3. Set clear payment terms and follow up on past-due invoices.

Regulating Accounts Payable

Being able to manage your accounts payable is a key factor of cash management as it directly affects your cash flow. To optimize your accounts payable, you can negotiate better payment terms with suppliers. Also, take advantage of early payment discounts and automate your accounts payable process using software.

Additionally, you must reduce the risk of late payments by setting up reminders for when bills are due. Additionally, prioritize bills that have the biggest effects on cash flow and communicate with suppliers if you’re unable to pay an invoice on time. This will help maintain a positive relationship with suppliers and prevent potential additional costs in the future.

Monitoring Inventory

This is a crucial aspect of cash management as it ties up a significant amount of cash. To improve cash flow, it’s important to reduce inventory levels and improve turnover.

One way to do this is by implementing just-in-time (JIT) inventory management. This system only orders inventory as it is needed. This helps to reduce the amount of cash tied up in inventory.

Another way is to implement an inventory turnover ratio. This method measures how many times inventory is sold and replaced in a given period. A higher ratio indicates that inventory is being sold more quickly. It’s also important to monitor slow-moving items. These are items that aren’t selling well and taking up valuable space in inventory.

In addition to reducing inventory levels, it’s also important to optimize inventory levels to minimize the risk of stockouts and overstocking. You do this by tracking inventory levels, setting reorder points, forecasting future demand, and using safety stock to mitigate the risk of stockouts.


Financing Options for Cash Management

When it comes to cash management, one of the most important decisions you’ll make is how to finance your business. There are a variety of options available, including loans, lines of credit, and issuing new shares of stock. Each option has its own pros and cons, and it’s important to find the right one for your business.


A loan is a lump sum of money that you borrow from a lender. You’ll need to pay back the loan, plus interest, over a set period of time. Loans can be a good option for businesses that need a large amount of cash quickly, but they can be difficult to qualify for and come with strict repayment terms.

Lines of Credit

This is similar to a loan, but instead of borrowing a lump sum of money, you can borrow up to a certain limit as you need it. This can be a good option for businesses that need flexibility in their financing. However, it typically has a higher interest rate than a loan.

Issuing New Shares of Stock

This option allows you to raise money by selling shares of your business to investors. It can be a good option for businesses that want to raise a lot of money quickly. However, it also dilutes the ownership of the business among the shareholders.

When considering financing options, consider the terms and conditions, interest rates, and overall cost of the financing. You should also consider the effect it will have on the long-term growth and success of your business.

Alternative Financing Options

It’s also worth exploring alternative financing options if traditional financing options are not available or feasible. Alternatives include crowdfunding, angel investors, or venture capital. These options can provide capital and mentorship to help grow your business.


Exploring Your Cash Management Options

Remember to be proactive and plan ahead, as well as be open to exploring different financing options. With the right strategies in place, you can keep your business running smoothly and set it up for long-term success.