Cash Management Strategies in the Current Economy
The silver lining of this economy is that businesses with fast access to cash may be able to take advantage of extraordinary opportunities.
The axiom that "cash is king" has never been truer than it is now. No matter what direction the economy takes, businesses with cash on hand – easily accessible either in traditional checking or money market accounts – will have an advantage over other businesses.
Here are four tips on how to stretch your cash in today's economy.
1. Set up a rainy day fund
In more traditional or stable times, you would want to have funds available in an incremental setup: cash to cover 30 days of expenses, money market funds for 90 days and 20 percent on top of that set aside in an easily accessible account, according to Lisa Anderson, president of LMA Consulting Group, Inc., Claremont, CA, which focuses on process strategies for businesses. These numbers might vary somewhat, depending on whether money comes in steadily over the year or if your business has seasonal spikes.
In addition to keeping cash on hand to cover 30 days of expenses, put an equal amount aside in a contingency fund, advises Christy Schmitt, Senior Vice President for Small Business Banking at Union Bank. "If a major customer cuts back or goes out of business, you may find yourself short of cash. Keep a rainy day fund to deal with surprises like that."
2. Leverage your cash
Consider ways to make your money go further. Schmitt suggests shortening the net number on invoices so customers pay receivables faster. Another method of leverage: Instead of putting money into a CD, Anderson suggests investing in an asset – such as equipment or a building – that might give you a bigger return than the current low interest rates will provide.
3. Watch for deals
"Companies with cash will also be able to take advantage of sale prices on potential assets," Anderson says. Consider this scenario: A supplier struggling to survive the downturn decides to sell material at a discount, or a competitor wants to sell out. Showing up with cash puts you at an advantage over other bidders arriving with IOUs. This can put you in a stronger competitive position once the economy improves.
4. Schedule your outlays
What's the exception to the rule? If you can calculate what your capital needs will be 6 to 18 months out, you can then set up longer-term investments, such as CDs, to mature when you need the cash. For example, if you want to buy a commercial vehicle in early 2011, you could set aside the down payment now in a one-year CD. This takes some foresight, but it can give you the advantage of both cash and interest.
A cash cushion can help protect you from surprises, Schmitt notes. But another key benefit is the edge you can gain over your competition. As Anderson says, "Other companies that are struggling won't be able to take advantage of the opportunities that you can."
ALSO IN THIS ISSUE
- Five Steps to Help Secure a Business Loan
- Follow these tips to help increase your chances of receiving the financing you want.
- Creating an Effective Credit Policy for Your Business
- Extending credit to your customers can increase sales, profits and loyalty. First, put together a policy that protects your business.