Cash Management

When you do not pay your loan on time, a temporary or bankruptcy trustee is appointed. By this time, the company may have already earned a small profit this month or its owners felt confident that in the next few months losses would give way to profit. Perhaps the business is expanding. However, all this absolutely does not mean anything if it is not possible to quickly pay debts.

It would be completely wrong to think that cash management is necessary only when the company is faced with the threat of bankruptcy. Effective cash management is so important that every company must deal with it round a year.

Cash management is necessary to optimize profits. Otherwise, the amount of interest paid to the bank will be unreasonably high. The financial service does not manage the company, nor does it manage money. In both cases, financiers only help their colleagues from the management team. Cash management is a key task for managers.

The foundation of effective cash management is a monthly detailed cash flow plan. Other critical components of monetary management include:

  • ensuring timely payment;
  • planning and control of cash for inventories and work in progress;
  • fast enough payments to creditors to avoid adverse commercial or financial penalties;
  • reasonable overhead costs;
  • access to necessary credit resources and bank overdraft;
  • regular comparison of actual cash flows with planned;
  • collaboration with the bank.

Account receivable management

Account receivable management covers the entire process of receiving timely payment from customers. Some people think that for this, you just need to send invoices and write reminder letters to those buyers who do not pay on time. If everything was so simple. But in reality, things are completely different. Below are the main elements of receivables management.


When delivering goods or services produced by a special order of customers, it is appropriate to recall the requirement of making a deposit. If there is no good reason to believe that this will harm business, such a policy should be pursued. Many companies and professional partnerships have found amazing willingness by customers to make a deposit, especially when the customers get to know the range of work ahead.

Submission of interim account

Many service companies are missing out on reasonable opportunities for issuing interim invoices, which should be agreed upon in advance, as the general settlement procedure. We must focus on invoicing the client immediately after each stage completion.

Fast invoice delivery

The use of complex blanks allows you to automatically issue an invoice, which is received by the buyer as part of the shipping documents accompanying the goods. A service bill, however, may be delivered with a significant delay.

Cash flow control

It is not enough to check a bank statement every month to make sure that the balance is consistent with the budget for cash receipts and payments. The situation may be significantly worse than it seems, because:

  • some large payments, such as VAT or for the building rental, were made, but have not yet passed an interbank clearance, and therefore are not reflected in the statement made at the end of the month;
  • accounting suspended payments to suppliers so as not to go beyond the cash flow plan or overdraft limit;
  • there will be a large unplanned payment next month.

Effective cash flow control requires monthly:

  • compare actual receipts and payments with planned ones to establish discrepancies that otherwise would have remained undetected for some time;
  • update the cash flow forecast for each of the next three months and the remainder of the financial year as a whole to determine if there is a need for a corrective plan.

In some large companies like Payday Loans Sonora CA, a cash flow forecast for the next month is prepared weekly to tightly control finances.

Cooperation with the bank institution

Some companies practice the wrong policy to avoid contact with the bank manager when possible. This is short-sighted. Sooner or later, the day will come when the support of the bank will be necessary to overcome the temporary payment crisis. When this happens, the good relations that have developed during regular contact with the bank certainly play an important role.

The minimum necessary communication is to call the bank if the overdraft limit is exceeded at least for a day. This is elementary politeness, which strengthens the bank’s confidence that the company is aware of the overdraft situation. If there is a possibility that the overdraft limit will become insufficient, you need to ask the manager for a meeting at which to talk about the terms and present an updated forecast of the monthly cash flow.

Some companies go even further. Periodically throughout the year, copies of audited accounting reports, an annual cash flow plan by month, and management reports are sent to the bank. This is optional. However, the confidence of the bank is increasing. It is also possible that the bank manager will propose an alternative solution to financial problems, which will be more attractive than an increase in overdraft.

Profit management

Every manager must understand how profit is gained. It may seem surprising, but standard or ordinary profit and loss statements do not fully disclose it. In order to effectively manage profit, this report needs to be analyzed in terms of variable and fixed costs, which will determine marginal profit.

Variable costs

Variable costs increase or decrease in direct proportion to sales. Examples of variable costs are:

  • materials from which finished products are made;
  • royalty payments on each unit of goods sold;
  • shipping costs when using the services of a carrier, and not the company’s own transport.

The share of variable costs in sales varies widely depending on the type of activity. At the discounted goods’ selling, variable costs make up a significant portion of sales. In ten-lane bowling, by contrast, the percentage of variable costs is low. Profit is always affected by the level of fixed costs in the company, independent of the achieved sales volume.

Fixed costs

Despite fluctuations in sales, fixed costs remain unchanged in the short term, unless special measures are taken. These costs tend not to depend on volume, but on time, such as monthly wages and depreciation. Examples of fixed costs are:

  • rent;
  • local taxes;
  • depreciation;
  • wage;
  • cleaning expenses.

Some of these costs are partly variable. An obvious example is a phone charge that consists of a monthly fee and time-based payments, depending on the length of calls. For industrial companies, an important problem is the classification of production labor costs. They are directly related to the product cost but are not necessarily variables. Only a few companies can hire workers in direct proportion to sales. In the short term, labor is seen rather as a permanent resource, and minor fluctuations in sales are offset by changes in inventory levels.

In order to simplify the calculations, some companies allocate costs, which are indisputably variable, while all others classify as constant. This is not entirely true, but it seems appropriate.