Cash management in business can take many forms, including your cash collections process, managing your accounts payable, escrowing cash, line of credit utilization, savings accounts, weekly cash needs, etc. But as the business owner, you determine the frequency of each of the above processes and to what degree you get involved.
Accounts receivable
Your accounts receivables are the life blood of your organization. The consistent influx of cash is needed for sustainability and for you to be able to grow your business.
Never ever take your eye off of your AR Aging Detail Report. My recommendation is to put a weekly mechanism in place with your accountant. Review the past due balances. In that meeting, determine who will contact past due customers and the method of contact (email or phone call).
Remember, collection calls can be emotional and a relationship-harming activity. It’s important to put in a policy and procedure surrounding this activity. Blaming your action on the “company policy” helps remove the emotion. For example, “I’m sorry. It’s our company policy that if your balance exceeds 90 days past due we will have to discontinue service.”
Weekly cash needs
It’s important to know how much cash your business has on hand compared to how much cash it will need.
Have your accountant prepare a Weekly Cash Needs Report and distribute it to each shareholder. Items that should be included in this report are funds available, expenses, liabilities and actual weekly cash received versus average weekly cash received. The report will then conclude with how full your “glass” is — 42 percent, 140 percent, etc.
The fun part is when your glass is more than 100 percent full. If you have a fundamentally profitable business this indicates the amount of free cash flow your business has. Now you get to decide what to do with that free cash flow: pay down debt, savings, owner distribution, etc.
Recession proof
Judging by our history, it would seem that recessions are as certain as death and taxes. According to Wikipedia, there have been as many as 47 recessions dating back to the Articles of Confederation. Between 1945 and 2008, we’ve had 12 recessions that lasted an average of 10 months.
You have to build a business that is sustainable during these challenging times. My recommendation is that your company opens a savings account of recessionary savings. Your cash goal should be three to five months of operating expenses. Most businesses won’t be able to hit this goal in one year. Identify a realistic goal each year for this savings account and ensure you hit that goal.
Albert Einstein once said, “The future is an unknown, but a somewhat predictable unknown. To look to the future, we must first look upon the past.”
Look upon the past of our nation. The next recession is coming, which makes your business’s future somewhat predictable. Plan for that predictable future and you will have built yourself a recession-proof business.
Dennis W. Lejeck is the president and founder of Black Knight Security. Dennis is a graduate of the University of Pittsburgh’s Institute for Entrepreneurial Excellence and has also participated in the EY Entrepreneur Of The Year® program. BKS was recognized in 2008, 2015, 2016 and 2017 as one of the 100 Fastest Growing Companies in Pittsburgh.
