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Understanding Cash and Cash Management

Managing cash effectively is crucial for the success and sustainability of any business. The first step is understanding your cash flow, then planning for it, and finally managing cash flow when cash gets tight.

Things to Know About Cash and Cash Management

  1. Not All Cash is Created Equal: Different types of cash flows, such as operating, financing, and investing cash flows, have distinct characteristics and implications for a business.
  2. Operating Cash Flow: This is a measure of a company’s ability to convert income into cash. It’s a critical indicator of financial health.
  3. Financing and Investing Cash: These types of cash flows may need to be repaid, so it’s important to manage them carefully.
  4. Operating Cash Flow vs. Net Income: Ideally, operating cash flow should be greater than net income, as it indicates a company’s ability to generate sufficient cash from its operations.
  5. Cash vs. Net Income: Cash is what you can spend, not net income. This distinction is vital for day-to-day operations.
  6. Cash is King: When you’re out of cash, you’re out of business. Maintaining adequate cash reserves is essential.
  7. Key Financial Metrics: Understanding the relationship between assets, revenue, net income, and cash flow is fundamental to effective cash management.

How to Create a Basic Cash Flow Projection

  1. Weekly Projections: Project cash flow on a weekly basis for the next 12-16 weeks.
  2. Estimate Timing: Accurately estimate the timing of all cash inflows and outflows.
  3. Update Regularly: Update your projections weekly with actual figures to stay on track.
  4. Extend Projections: Continuously project out an additional week to maintain a rolling forecast.

Things to Keep in Mind When Managing Cash

  1. Timing of Cash Flows: There can be significant delays between investor rounds, accounts receivable (A/R) collection times, and net losses prior to operations becoming profitable.
  2. Calculate Cash Burn Rates: Knowing how quickly you’re spending cash is crucial for planning and sustainability.
  3. Budgeting for Cash Inflows and Outflows: Accurate budgeting helps ensure you have enough cash to cover expenses when needed.
  4. Planning for Large Cash Outlays: Be prepared for significant expenses related to fixed assets, accounts payable (A/P), debt, lines of credit (LOC), inventory, payroll, program expenses, office space, equipment, legal fees, marketing, fundraising, and other operating costs.

Tips to Manage Cash Flow

  1. Delay Paying A/P: Extending the time to pay your accounts payable can help manage cash flow.
  2. Decrease A/R Collection Times: Speeding up the collection of accounts receivable improves cash flow.
  3. Decrease Expenses: Reducing costs where possible helps conserve cash.
  4. Increase Revenue: Focus on retaining existing customers and acquiring new ones to boost revenue.
  5. Sell Assets: Liquidating non-essential assets can provide a quick cash infusion.
  6. Reduce Asset Purchases: Ensure that every asset purchase yields the highest possible return on investment.
  7. Borrowing Options: Consider borrowing from savings, cashing out investments, or obtaining loans if necessary.

By understanding and implementing these principles, you can effectively manage your cash flow and ensure the financial stability of your business. At Tanner we work hard to manage cash flow for our clients.