Money management is an essential to running a successful business.
When done well, no one notices. But when done poorly, everyone notices, there will be much unhappiness and, in a worst-case scenario, problems with cash can grind a business to a halt.
Many small businesses stay small because of the way they manage their cash. In order to grow, cash management must evolve from a short-term tactical process to a long-term strategic management process.
The typical IT solution provider maintains a cash balance equal to 46 percent of average monthly sales, according to market statistics produced by Corelytics. Many companies rely heavily on credit cards to make purchases and stretch their cash — a practice that can leave a company close to the edge, often just one bad deal away from shutdown.
A more ideal cash balance would be the equivalent of two to three months of sales. With more cash, business owners have more flexibility and can focus on growth and expansion.
Building good cash management disciplines will help you think about the steps you can take to strengthen your cash position. When your balances are headed in the right direction it becomes easier to delegate routine accounting activities and move your focus to a bigger picture — growing and developing the asset value of your company. (CompTIA’s resources available to IT solutions providers include cash flow management strategies.)
There are two basic approaches to cash management in a company depending on your levels of cash reserve:
- If you have two to three months of cash reserves, you’ll likely take a “forecast and monitor” approach, which is longer term in nature and therefore more strategic.
- If you’re operating with little or no reserves, you need to take a tight cash control approach, which is more tactical and geared to the short term.
Many small business owners operate in a tight cash control mode all the time. Some have never known any other possibility. In worst-case scenarios you end up with a list of bills that you keep paying as cash comes in the door. The danger with this is that you will pay bills as you can, but you may run short when it’s time to pay the regular monthly bills such as pay-roll. When this happens there’s a high risk that the company is not going to make it.
Even companies that usually operate with a healthy reserve will experience times of tight cash flow and may even have a “near death” experience.
Conversely, companies will occasionally have a spike in cash availability and have the opportunity to get strategic and put this money to wise use. The goal is to get your company into a position of adequate cash reserve where you can be much more strategic in the management of the business on an ongoing basis.
It’s also important to know that companies that operate close to the line have much less value in the market. Companies with great revenue growth and poor cash position create the impression that they may be underpricing their services or have poor internal controls, all of which translates into a “fixer upper” and not a premium value company.
Companies that have a good history of cash balances with a cash trend line that matches or exceeds the rate of revenue growth get a premium value in the market. The work required to get a premium value for your company is much less than you might think, but it must be done on an ongoing basis.
Understanding when to think tactically and when to think strategically is crucial regardless of how new or how well established your company may be. These are two important ways to think about your business.
Both will play an important role as your cash position cycles through highs and lows.