The amount of cash you have on hand is one of the most important metrics for the growth and survival of your company. As a business owner three of your primary financial responsibilities are:
To put it simply, you need to know where your cash is, plan its path through the business and how to make the most of every dollar.
Think of cash as the fuel that runs your business. Lacking cash can leave you stranded on the side of the road while the competition zooms by. A business, like a car, won’t go anywhere without fuel. The last thing you want is to be walking for miles with that gas can in your hand.
Accordingly, you must be aware of how much fuel you have in your tank at any time. You must understand the efficiency in which your business is burning it, where your next fill-up is coming from, and how well your reserves are performing. How do you monitor all this? By implementing an effective cash management system; which forms a part of every well managed company’s financial controls.
Managing this vital component requires the use of simple, well-documented control systems for the money flowing through the business. It needn’t be an overly complex system, but it must cover two categories: money coming in and money going out.
Money coming into the business includes:
Money going out of the business includes:
The complexity of your cash management systems will depend on your business’ stage of development.
In the infancy or young stage of a business, you’re likely to experience periods of growth. Your cash is cycled from revenue to expense very quickly during this time, allowing just enough cash flow to add resources or fulfill demand. If at any point during this stage, there is a major cash shortage, you could be in big trouble. Your cash management system provides an early detection system for such events and allows you to make adjustments before it’s too late.
As your business matures, your cash management priorities shift slightly from a purely internal perspective to a more balanced internal and external focus. Cash on hand and meeting the day-to-day needs of your business is always top priority, but cash is too valuable to be sitting around doing nothing. Businesses with cash reserves can create competitive advantages through joint ventures, acquisitions, research and development, traditional savings and smart investments. While many of these activities may seem more likely for large public corporations, by focusing your efforts in a similar fashion, cash savvy small companies can leverage their cash position as a competitive strategy.
The fastest way to get your cash and related money management systems in place is to perform a quick audit of your current systems. From there you can create an action plan to get from where you are, to where you need to be.
Begin by assigning a performance score to rank each component of your cash system according to how well it meets its intended goal After you’ve scored each component, or sub-system, prioritize the list in terms of relevancy and urgency. This becomes your development plan for making improvements.
For example, a retail client of mine recently set up a ranking system from -10 to +10, and ranked her cash management systems as follows:
After a careful consideration of which systems would affect her cash flow fastest she prioritized her system development as follows: inventory control, invoicing and accounts receivable, credit transactions, collections, purchasing and accounts payable. This simple step gave her a clear path towards improving all her cash management systems. Of course, each business is different, but this same ranking system and prioritizing your development will lead to the same result my client achieved: a feeling of comfort and calmness, as she experienced a sense of control over all areas of her cash systems.
Have you implemented a cash management system? How has it helped you?
Need help controlling the cash flow in your business? At our Six Steps to Maximize Cash Flow virtual seminar an E-Myth Business Coach will help you identify and maximize the cash in your business. We’ll offer tips you’ve probably never even considered…
ramalinggam k. says:
So simple yet so difficult to do. Why? Because we are so busy buying and selling products we underestimate the importance of this metric until it is too late. How to develop a CASH consciousness, i.e how to be the cash flow of the business?
Submitted Aug 19, 2009 11:25 PM
Simon E. J. says:
Submitted Aug 20, 2009 4:08 AM
shadrack i. says:
As much as cash is the oil that runs a bussiness,the people who should give it to you (the customers),may decide to hold it from you.How do you siphone it from them without force?.Am suprised when i offer services to the customers and they withhold the cash, intentionally or unintentionally.
Submitted Aug 22, 2009 10:31 AM
Angela H. says:
When dealing with customers get a commitment to pay or how they will pay 1st think of it as a test close, When you ask them to fill out the forms or you start filling it out ask them "how do you usually pay for your...(cash, credit, invoice..etc.) Will you give me the same business courtesy in how we handle your account? Not to force them, but get them to look at you as the same type of professional that is providing for them.
Submitted Aug 23, 2009 5:50 AM
Sam P. says:
What a great article and I have found the real problem with all this cash management is human nature: PROCRASTINATION. I have found a system that works for all my business, marketing, tracking, campaigns and UDEDUCT a cash flow monitor of expenses, deductions and tracking daily up to date of TAX PLANNING as you go. It all is presented on the webpage of
www.mybizpack.com/SIBAONE
EMYTH is always right on in Concepts and Strategies, but this is a system of how to.
Thanks for all you do EMYTH!
Submitted Aug 24, 2009 4:48 AM
GEORGE W. says:
You are an amazing organization. Your articles depict the seriousness and the zeal with which you discharge your mandate as entrepreneurial consultants. It is as if you enter the minds of entrepreneurs globally and disect these minds to get to know what goes on in there. Cash Management is the most crual area of business that will determine its survival in the long run. I have deliberately planned on the movement of cash in and out of my business. First and foremost is to get to understand your clients and their payment habits. There are those who take long to pay whereas there are those who are prompt. This analysis will then become important in planning for the cash movement and circulation in the business. In my case I have developed a system and come up with a book where I record both the Receipts and Disbursements of cash to monitor the movement and to act as a control.
Submitted Aug 28, 2009 3:25 AM
Mabel ofenwa o. says:
Iam so happy to have discovered Emyth mastery solution to entrepreneurs in the system development in organisations .In my organisation i have began to implement some of the things i have learnt from the emyth books Thank you very much
Submitted Aug 28, 2009 4:24 AM
Mabel ofenwa o. says:
Submitted Aug 28, 2009 4:34 AM
Raphael N. says:
Agree completely! We are taking total control of our cash. But the first step was to realize how important this is! The most important skill is discretionary use of time and focus. Without that you won't see that cash rules everything.
Responding to Sam P's comment about PROCRASTINATION. I disagree. When I want something bad enough I decide to buy it right then (or maybe from another source) but I will buy it "NOW". If someone doesn't want to buy it on the spot YOU didn't make them want it bad enough.
This gets into the whole caviat that most sales people run into: Selling. There's no need to sell someone on something and force them to buy it. Instead simply focus on getting them to 1) Know, 2) Like, and 3) Trust you. Then the right people will buy. Getting the cash out of their wallet is pretty much automatic then. The three points come from John Jantsch's book "Duct Tape Marketing" which by the way is a must read.
Raphael N
ChessHouse.com
Submitted Aug 29, 2009 2:41 PM
Subscribe to the E-Myth ViewPoint Newsletter
Follow E-Myth on Twitter
