Cash management refers to a broad area of finance involving the collection, handling, and usage of cash and available bank balances. Understanding following cash management tools and technique will help you better manage:
1. Basics - Accelerating Collection of Accounts Receivable and Stretching of Accounts Payable
2. The Matrix - Dividing the expenses into priority and importance matrix. My views:
First Important and priority expenses to be paid, then important expenses, after that priority expenses. Defer all unnecessary expenses. Speaks to your vendor about the difficult situation most of them will understand your position in the current scenario.
3. Buffer Cash - Maintain a minimum level of cash every time. This will be helpful in case of emergency requirements.
4. Apply for the Non-fund based limit from the bank eg Bank Guarantee, given on a small charge. Many good vendor companies will be happily accepting guarantee from the bank and be ready to defer the actual payment.
5. Gross Cash Burn Rate - The burn rate is usually quoted in terms of cash spent per month.
Net Cash Burn Rate - The burn rate is usually quoted in terms of cash spent per month after deducting revenue from it.
6. Runway – This shows how many months my existing cash in hand will help me to run the business. Formula is Cash in hand divided by Net Cash Burn rate
7. Float – It refers to the periods that affect cash as it moves through the different stages of the collection process. While making any decision take note of float. Eg – Mutual fund redemption through banks can take a float of 3-4 day time as they are working half the capacity.
8. Ageing analysis – Age or period wise bifurcation of both debtors and creditors must be tracked.
9. Look at your Quick Assets and Quick liabilities – i.e which is getting matured or payable in next 1 month. This will help to forecast the current assets and current liabilities. Do it on Daily basis!
10. Spreading out – Instead of giving a payment in one shot, give payment in 3-4 slot. This will ease the cash flow of big payments without losing vendor confidence.
11. Cash forecasting – The same needs to be prepared day wise, week wise and month wise to keep the better track of situation.
12. Ask for favour – If you are pretty sure that vendor won’t budge for delaying the payment, then ask for the extra discount or discount in next cycle. Don’t hitch, ask for the favour.
13. Credit Cards – Small business owners are eligible for credit cards but they don’t use it. Now is the time to use this. Further Employees and related parties can also help the owner for additional cards.
14. Focus on Cash at the moment and not at the profit. After few weeks you will realise Cash is the king in the bad market situations.
15. Lastly, if you are running out of options, better to ask your bank for financing more. If you have good credit history, then bank can give Unsecured Loans. Further, few bank manager have powers to give short term loan for 15 days; one can keep roll over this for 2-3 months. Still facing hard luck then try NBFCs or local unsecured loans, though with higher rate of interest.
Hope this helps you!
