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Cash Management Best Practices

Posted by Luda Arkhipov on Apr 10, 2014 12:51:00 PM

What is the most important asset on the balance sheet in terms of running day-to-day operations?  That’s right, it is cash.  Cash is the heart of every business, and every company needs cash to pay suppliers, employees, contractors, purchase equipment, etc. What are some of the best practices in cash management? 

Monthly Budgeting is Key

The first and probably the most important step you can take to help you control and manage cash is to develop and review budgets on a periodic basis throughout the year.  How would you like to realize one month that you don’t have enough cash available to pay your employees because you did not budget your monthly cash receipts and expenses, and you purchased an expensive piece of equipment in the beginning of the month? Monthly budgeting allows you to control and predict cash ins and outs and see how much cash you will have at the end of each period.

Speed Up Deposits with Lockbox Services or Electronic Check Processing

How long does it take your receivable clerk to deposit checks received to a bank?  Most companies don’t do it every day - in most cases it is done on a weekly basis.  As a result, you are not able to use this cash until it gets deposited.  When using lockbox services, payments received are deposited on the same date, and are posted to customer’s accounts by the receivable clerk on the next day based on deposit reports received from the bank.  In addition to speeding up cash flow, it is an important tool to prevent “cash lapping”.  If your company decides not to use a lockbox, you can still speed up deposits by utilizing electronic check processing.  Instead of physically going to the bank and making deposits, you can scan and deposit funds in the convenience of your own office by using an electronic check scanner.  Deposits are posted to your bank account on the same day and are available for you to use immediately (unless bank holds are placed on deposits for various reasons).

Consolidate Bank Accounts

Consolidating bank accounts is another strategy that could help your company get a better picture about your cash position as monthly cash reconciliations and inter-account transfers could be confusing if you have multiple bank accounts.  At the same time, it is highly advisable to have a separate payroll account to avoid potential payroll check fraud or “ghost” employees.

Implement a Cash Composition Policy

Improving deposit yields is another popular tool to help your cash flow.  Your company should have a cash composition policy that specifies how and where cash could be invested and allocated.  For example, one of the popular treasury management tools that banks offer is sweep accounts.  In this arrangement, funds in excess of a predetermined limit (usually average cash needed for daily operations) are swept to higher yield accounts.  As a result, it earns more interest than if it were sitting in the operating account. 

Cash control importance cannot be stressed enough as cash is what funds your company’s operations, and your business will never thrive if you don’t have enough cash to finance its daily activities.  By having a clear picture of where your company stands in terms of cash position and being able to better control and manage your cash position, you can make better business decisions on when and how to spend money.

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Topics: Small Business, Accounting & Auditing

Luda Arkhipov

Luda Arkhipov

Luda is a Senior Manager in Meaden & Moore’s Assurance Services Group with over twelve years of experience. She provides public accounting services to a wide variety of clients in various industries, including construction, biotech, manufacturing and distribution. Luda’s responsibilities include planning of engagements, preparing financial statements, working with clients and the accounting staff to find solutions to problem areas, and developing ideas for growth. Luda also conducts audits of 401(k) plans, pension, ESOP plans, and health and welfare plans.