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As the economy dips and investors get more nervous, businesses will begin to feel the liquidity pinch. At the same time, companies with strong cash management skills can avoid some of the difficult financial times.

Cash is the lifeblood of the business and, in a down economy, only the most "cash efficient" businesses will survive. However, cash management is not for the faint-hearted. Good cash management requires self discipline to keep a steady course during the roughest of times; and, self confidence to project future cash requirements with the greatest amount of accuracy.

The most critical aspect of cash management is understanding the flow of funds through the business. Starting with the company’s business plan, identifying future revenues and corresponding expenditures, you can determine the timing of each cash flow element in the cash flow cycle.  

13-week Critical Plan

Cash flow budgets should be planned in 13-week intervals. To do this, each source and use of cash should forecasted and budgeted as accurately as possible. The cash flow budget should be reviewed and updated on a weekly basis. This review will allow you to test your cash flow assumptions and make adjustments for unexpected cash flow items. Using the cash flow budget will allow management to be proactive in preparing for the timing of both cash receipts and cash disbursements.

Some of the key elements of the cash flow budget are:

• For accounts receivables, establish procedures to improve:
  1. Average collection periods and aging
  2. Monitor credit quality of the receivables
  3. Improve billing procedures to reduce invoice payments
  4. Enhance the conversion of receivables to cash

• For inventory, establish procedures to improve:
  1. Determine economic forecasted inventory balances
  2. Improve inventory turnover
  3. Turn obsolete inventory into cash
  4. Focus on cash as well as gross profit margins

•   For accounts payable, establish procedures to improve:
  1. Remain less reactive to vendor requirements
  2. Consistently stretch out average payment terms
  3. Obtain discounts when faster payments are made.

The most critical element of a cash flow budget is to recognize that there will be no long-term cash flows without accurate short-term cash flows. Growth requires cash availability to provide for new products or services.  Cash will always be the life-blood of the business and there will be no long-term business if you ignore the short-term cash flow needs.