CASH IS THE CORNERSTONE of any business, large or small. Without cash, payrolls can’t be met, materials can’t be purchased, rent and utilities can’t be paid, and dividends can’t be distributed. It is unfortunate that current business practices cloud this truism, leading unsuspecting business owners and managers to disregard the criticality of managing in such a way as to ensure cash flows adequate to meet their company’s operating needs.
For example, current accounting practices permit companies to show a profit on their financial statements even though they don’t have enough cash to meet one week’s bills. Governments levy taxes without regard to whether companies have the cash to pay them. Currently acceptable business valuation practices calculate the worth of a company on the basis of future earning potential, regardless of the company’s ability to pay this month’s rent. And banks frequently lend money against overvalued business assets without verifying that the borrower has the wherewithal to repay the loan on schedule.
There is nothing very complicated about cash management. In the simplest terms, cash management is a set of procedures aimed at maximizing the amount of cash available at any given time. Record keeping is one tool of cash management. Predicting future cash needs is another. Analyzing where our cash comes from and where it goes is a fundamental cash management procedure. So is analysis of the interaction between accounting reports and cash flows.
We all practice cash management in our daily lives when we keep track of checks we write and deposits we make. Only in this way can we be certain that we have enough cash in our checking accounts to cover tomorrow’s checks. The same principle applies to